Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q
AbstractThis paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin's Q driven by Irving Fisher's debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 960.
Date of creation: 2008
Date of revision:
Other versions of this item:
- Enrique G. Mendoza, 2008. "Sudden Stops, Financial Crises and Leverage: A Fisherian Deflation of Tobin's Q," NBER Working Papers 14444, National Bureau of Economic Research, Inc.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- 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
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-07 (All new papers)
- NEP-BEC-2009-02-07 (Business Economics)
- NEP-DGE-2009-02-07 (Dynamic General Equilibrium)
- NEP-MAC-2009-02-07 (Macroeconomics)
- NEP-OPM-2009-02-07 (Open Economy Macroeconomic)
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- Zheng Liu & Pengfei Wang & Tao Zha, 2010.
"Do credit constraints amplify macroeconomic fluctuations?,"
2010-01, Federal Reserve Bank of Atlanta.
- Zheng Liu & Pengfei Wang & Tao Zha, 2009. "Do credit constraints amplify macroeconomic fluctuations?," Working Paper Series 2009-28, Federal Reserve Bank of San Francisco.
- Zheng Liu & Pengfei Wang & Tao Zha, 2009. "Do Credit Constraints Amplify Macroeconomic Fluctuations?," Emory Economics 0910, Department of Economics, Emory University (Atlanta).
- Claessens, Stijn & Kose, Ayhan & Terrones, Marco E., 2008.
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- Marco Terrones & M. Ayhan Kose & Stijn Claessens, 2008. "What Happens During Recessions, Crunches, and Busts?," IMF Working Papers 08/274, International Monetary Fund.
- Philip L. Brock, 2009. "Collateral Constraints and Macroeconomic Adjustment in an Open Economy," Working Papers UWEC-2009-03, University of Washington, Department of Economics.
- Hevia, Constantino, 2009. "Emerging market fluctuations : what makes the difference ?," Policy Research Working Paper Series 4897, The World Bank.
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