Endogenous Cycles in a Stiglitz-Weiss Economy

We show that all it takes to produce cycles in a dynamic Stiglitz-Weiss economy is the inclusion of a state variable. The resulting simple model allows for a transparent exposition of the mechanism that generates cycles in a moral-hazard economy. Rents play crucial role in that mechanism. The mechanism may still operate after all possible contingencies have been written into the financial contracts. This includes indexation. That cycles may exist in a world without any aggregate uncertainty is a dramatic demonstration of the potential amplifying effect of financial markets imperfections on economic fluctuations. 

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