Macroeconomic Adjustment under Loose Financing Conditions in the Construction Sector
AbstractWe provide a model with sector-specific debt-collateral constraints to analyse how asymmetric financing conditions across sectors affect the aggregate investment, credit and output composition. In our model, investments in the construction sector allow for higher leverage than investments in the non-durable consumption goods sector. When borrowing constraints bind in both sectors, unit returns in the construction sector are lower due to a positive pledgeability premium, and changes in interest rates have a non-monotonic effect in the sectoral composition of investment. Specifically, a fall in interest rates triggers a relative rise in investment in the consumption goods sector when rates are relatively high, whereas the opposite effect obtains when rates are sufficiently low. We argue that this prediction of the model, which depends critically on the asymmetries of financing conditions across sectors, is consistent with the evidence for a number of OECD countries during the decade before the 2007/08 crisis.
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Bibliographic InfoPaper provided by BBVA Bank, Economic Research Department in its series Working Papers with number 1226.
Length: 29 pages
Date of creation: Nov 2012
Date of revision:
investment and credit; pledgeability premium; collateral constraints; sectoral allocation; housing;
Other versions of this item:
- Arce, Óscar & Manuel Campa, José & Gavilán, Ángel, 2013. "Macroeconomic adjustment under loose financing conditions in the construction sector," European Economic Review, Elsevier, vol. 59(C), pages 19-34.
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-MAC-2012-12-06 (Macroeconomics)
- NEP-URE-2012-12-06 (Urban & Real Estate Economics)
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