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Leverage and deepening business cycle skewness
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Jensen, Henrik, Petrella, Ivan, Ravn, Søren Hove and Santoro, Emiliano (2020) Leverage and deepening business cycle skewness. American Economic Journal: Macroeconomics, 12 (1). pp. 245-281. doi:10.1257/mac.20170319
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Official URL: https://doi.org/10.1257/mac.20170319
Abstract
We document that the U.S. and other G7 economies have been characterized by an increasingly negative business cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become non-binding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, on the other hand, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.
| Item Type: | Journal Article | ||||||
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| Alternative Title: | |||||||
| Subjects: | H Social Sciences > HB Economic Theory | ||||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Library of Congress Subject Headings (LCSH): | Group of Seven countries, Econometric models -- United States, Econometric models -- France, Econometric models -- Canadá, Econometric models -- Germany, Econometric models -- Italy, Econometric models -- Japan, Econometric models -- Great Britain | ||||||
| Journal or Publication Title: | American Economic Journal: Macroeconomics | ||||||
| Publisher: | American Economic Association | ||||||
| ISSN: | 1945-7707 | ||||||
| Official Date: | January 2020 | ||||||
| Dates: |
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| Volume: | 12 | ||||||
| Number: | 1 | ||||||
| Page Range: | pp. 245-281 | ||||||
| DOI: | 10.1257/mac.20170319 | ||||||
| Status: | Peer Reviewed | ||||||
| Publication Status: | Published | ||||||
| Publisher Statement: | "Copyright © 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018 by the American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted. The author has the right to republish, post on servers, redistribute to lists and use any component of this work in other works. For others to do so requires prior specific permission and/or a fee. Permissions may be requested from the American Economic Association Administrative Office by going to the Contact Us form and choosing ""Copyright/Permissions Request"" from the menu. " | ||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||
| Copyright Holders: | Jensen, Henrik, Petrella, Ivan , Ravn, Soren Hove, Santoro, Emiliano | ||||||
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| Open Access Version: |
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