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Leverage and Deepening Business Cycle Skewness

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  • mac.20170319

    Forlagets udgivne version, 959 KB, PDF-dokument

We document that the United States 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 nonbinding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, however, 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 nonfinancial expansions.
OriginalsprogEngelsk
TidsskriftAmerican Economic Journal: Macroeconomics
Vol/bind12
Udgave nummer1
Sider (fra-til)245-281
ISSN1945-7707
DOI
StatusUdgivet - 2020

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