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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. Adriano Rampini & Andrea Eisfeldt, 2007. "Leasing, Ability to Repossess, and Debt Capacity," Working Papers 07-19, Center for Economic Studies, U.S. Census Bureau.
  2. Lorenzoni, Guido & Walentin, Karl, 2007. "Financial Frictions, Investment and Tobin’s q," Working Paper Series 208, Sveriges Riksbank (Central Bank of Sweden).
  3. Gavazza, Alessandro, 2010. "Asset liquidity and financial contracts: Evidence from aircraft leases," Journal of Financial Economics, Elsevier, Elsevier, vol. 95(1), pages 62-84, January.
  4. Alessandro Gavazza, 2011. "Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(2), pages 325 - 377.
  5. Andrea Caggese, 2003. "Financing constraints, irreversibility, and investment dynamics," LSE Research Online Documents on Economics 24828, London School of Economics and Political Science, LSE Library.
  6. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  7. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  8. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(1), pages 17-34, January.
  9. 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.
  10. Zheng Liu & Pengfei Wang & Tao Zha, 2011. "Land-price dynamics and macroeconomic fluctuations," NBER Working Papers 17045, National Bureau of Economic Research, Inc.
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