Advanced Search
MyIDEAS: Login to save this paper or follow this series

Learning Financial Shocks and the Great Recession

Contents:

Author Info

  • Patrick A. Pintus

    ()
    (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))

  • Jacek Suda

    ()
    (Banque de france - Banque de France)

Abstract

This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their uncertain environment. When agents update their beliefs about the parameters that govern the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with actual leverage innovations observed over that period, the learning model predicts a sizeable recession in 2008-10, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the amplification due to learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://halshs.archives-ouvertes.fr/docs/01/01/00/28/PDF/WP_2013_-_Nr_33.pdf
Download Restriction: no

Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00830480.

as in new window
Length:
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:hal:wpaper:halshs-00830480

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00830480
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/

Related research

Keywords: borrowing constraints; collateral; leverage; learning; financial shocks; recession;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning And Business Cycle Fluctuations," CAMA Working Papers 2008-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Boz, Emine & Mendoza, Enrique G, 2010. "Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7967, C.E.P.R. Discussion Papers.
  3. Chakraborty, Avik & Evans, George W., 2008. "Can perpetual learning explain the forward-premium puzzle?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 477-490, April.
  4. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2004. "Learning and shifts in long-run productivity growth," Working Paper Series, Federal Reserve Bank of San Francisco 2004-04, Federal Reserve Bank of San Francisco.
  5. Pei Kuang, 2013. "Imperfect Knowledge about Asset Prices and Credit Cycles," Discussion Papers, Department of Economics, University of Birmingham 13-02, Department of Economics, University of Birmingham.
  6. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Working Papers 050608, University of California-Irvine, Department of Economics.
  7. Aiyagari, S.R. & Gertler, M., 1998. ""Overreaction" of Asset Prices in General Equilibrium," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-25, C.V. Starr Center for Applied Economics, New York University.
  8. Jeffrey R. Campbell & Zvi Hercowitz, 2006. "Welfare implications of the transition to high household debt," Working Paper Series, Federal Reserve Bank of Chicago WP-06-27, Federal Reserve Bank of Chicago.
  9. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 739-764, June.
  10. James B. Bullard & John Duffy, 2004. "Learning and structural change in macroeconomic data," Working Papers, Federal Reserve Bank of St. Louis 2004-016, Federal Reserve Bank of St. Louis.
  11. repec:fth:starer:98-25 is not listed on IDEAS
  12. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers, Edinburgh School of Economics, University of Edinburgh 1995-5, Edinburgh School of Economics, University of Edinburgh.
  13. Branch, William A. & Evans, George W., 2006. "A simple recursive forecasting model," Economics Letters, Elsevier, Elsevier, vol. 91(2), pages 158-166, May.
  14. Fabio Milani, 2011. "Expectation Shocks and Learning as Drivers of the Business Cycle," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(552), pages 379-401, 05.
  15. Thomas Philippon & Virgiliu Midrigan, 2013. "Household Leverage and the Recession," 2013 Meeting Papers, Society for Economic Dynamics 335, Society for Economic Dynamics.
  16. repec:fth:starer:9825 is not listed on IDEAS
  17. Andreas Fuster & Benjamin Hebert & David Laibson, 2012. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Macroeconomics Annual, University of Chicago Press, University of Chicago Press, vol. 26(1), pages 1 - 48.
  18. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  19. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43, pages 255-296, 03.
  20. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 2132-56, August.
  21. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  22. Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1997. "Dualism and macroeconomic volatility," CEPREMAP Working Papers (Couverture Orange) 9720, CEPREMAP.
  23. Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, University of Chicago Press, vol. 26(1), pages 77 - 122.
  24. Patrick Pintus & Yi Wen, 2013. "Leveraged Borrowing and Boom-Bust Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 617-633, October.
  25. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, Elsevier, vol. 48(2), pages 337-368, August.
  26. Dan Cao, 2011. "Collateral Shortages, Asset Price and Investment Volatility with Heterogeneous Beliefs," Working Papers, Georgetown University, Department of Economics gueconwpa~11-11-01, Georgetown University, Department of Economics.
  27. Fuster, Andreas & Hebert, Benjamin Michael & Laibson, David I., 2012. "Investment Dynamics with Natural Expectations," Scholarly Articles 10139283, Harvard University Department of Economics.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:halshs-00830480. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.