MONEY, CREDIT, AND BUSINESS CYCLE COMOVEMENT

We developed a two-sector general equilibrium model with money and credit to study cross-sector comovement over the business cycle. Through a working capital channel, both money and productivity shocks can generate procyclicality of sectoral activities and positive cross-sector correlations of output, employment and investment. In our model, firms in each sector borrow in the credit market to finance their purchase of labour inputs, part of which are used in the adjustment process of capital stock. The shocks affect sectoral employment and investment through their impacts on interest rates and external finance premia.