Citation
Discussion Paper Details
Please find the details for DP12239 in an easy to copy and paste format below:
Full Details | Bibliographic Reference
Full Details
Title: Leverage and Deepening Business Cycle Skewness
Author(s): Henrik Jensen, Ivan Petrella, Søren Hove Ravn and Emiliano Santoro
Publication Date: August 2017
Keyword(s): business cycles, credit constraints, Deleveraging and Skewness
Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations
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.
For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12239
Bibliographic Reference
Jensen, H, Petrella, I, Ravn, S and Santoro, E. 2017. 'Leverage and Deepening Business Cycle Skewness'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12239