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Capital over the business cycle: renting versus ownership

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  • Gal, Peter

    ()
    (Tinbergen Institute and OECD)

  • Pinter, Gabor

    ()
    (Bank of England)

Abstract

We find that capital renting makes up one fifth of US capital expenditures, and it increases during downturns. Further, we present cross-country evidence that output losses after financial crises are smaller where renting is more prevalent. To understand these findings, we build a general equilibrium model with borrowing constraints and with the option to rent or buy capital. The countercyclicality of rentals occurs because their supply increases, as renting serves as an additional means of savings when credit markets malfunction. Moreover, demand also shifts towards rentals as they become relatively cheaper. By absorbing excess savings, renting mitigates financial crises.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 478.

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Length: 51 pages
Date of creation: 16 Aug 2013
Date of revision:
Handle: RePEc:boe:boeewp:0478

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Keywords: Renting; capital; business cycle; financial shocks;

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  1. Andrea Caggese, 2001. "Financing Constraints, Irreversibility, and Investment Dynamics," Working Papers 53, Barcelona Graduate School of Economics.
  2. Lewis, Craig M. & Schallheim, James S., 1992. "Are Debt and Leases Substitutes?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 497-511, December.
  3. Zheng Liu & Pengfei Wang & Tao Zha, 2011. "Land-price dynamics and macroeconomic fluctuations," Working Paper 2011-11, Federal Reserve Bank of Atlanta.
  4. Adriano Rampini & Andrea Eisfeldt, 2007. "Leasing, Ability to Repossess, and Debt Capacity," Working Papers 07-19, Center for Economic Studies, U.S. Census Bureau.
  5. Gavazza, Alessandro, 2010. "Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft," MPRA Paper 28821, University Library of Munich, Germany.
  6. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  7. Guido Lorenzoni & Karl Walentin, 2006. "Financial Frictions, Investment and Tobin's q," 2006 Meeting Papers 844, Society for Economic Dynamics.
  8. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  9. Gavazza, Alessandro, 2010. "Asset liquidity and financial contracts: Evidence from aircraft leases," Journal of Financial Economics, Elsevier, vol. 95(1), pages 62-84, January.
  10. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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