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Leverage and Deepening Business-Cycle Skewness

Author

Listed:
  • Henrik Jensen
  • Ivan Petrella
  • Søren Hove Ravn
  • Emiliano Santoro

Abstract

We document that the United States and other G7 economies have been characterized by an increasingly negative business-cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become nonbinding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, however, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially driven expansions lead to deeper contractions, as compared with equally-sized nonfinancial expansions.

Suggested Citation

  • Henrik Jensen & Ivan Petrella & Søren Hove Ravn & Emiliano Santoro, 2020. "Leverage and Deepening Business-Cycle Skewness," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(1), pages 245-281, January.
  • Handle: RePEc:aea:aejmac:v:12:y:2020:i:1:p:245-81
    Note: DOI: 10.1257/mac.20170319
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Leverage and deepening business cycle skewness
      by Christian Zimmermann in NEP-DGE blog on 2017-10-17 05:29:42
    2. Leverage and Deepening Business Cycle Skewness
      by Christian Zimmermann in NEP-DGE blog on 2019-05-13 13:27:44

    Citations

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    Cited by:

    1. Patrick Fève & Pablo Garcia Sanchez & Alban Moura & Olivier Pierrard, 2019. "Costly Default And Asymmetric Real Business Cycles," LIDAM Discussion Papers IRES 2019018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Isabel Cairo & Jae Sim, 2017. "Income Inequality, Financial Crises and Monetary Policy," 2017 Meeting Papers 1433, Society for Economic Dynamics.
    3. Jordá, Óscar & Schularick, Moritz & Taylor, Alan M., 2020. "Disasters Everywhere: The Costs of Business Cycles Reconsidered," CEPR Discussion Papers 14559, C.E.P.R. Discussion Papers.
    4. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2020. "Capturing Macroeconomic Tail Risks with Bayesian Vector Autoregressions," Working Papers 202002R, Federal Reserve Bank of Cleveland, revised 22 Sep 2020.
    5. Paul Labonne, 2020. "Capturing GDP nowcast uncertainty in real time," Papers 2012.02601, arXiv.org, revised Dec 2020.
    6. Cyril Couaillier & Valerio Scalone, 2020. "How does Financial Vulnerability amplify Housing and Credit Shocks?," Working papers 763, Banque de France.
    7. Peter J. Boettke & Alexander W. Salter & Daniel J. Smith, 2018. "Money as meta-rule: Buchanan’s constitutional economics as a foundation for monetary stability," Public Choice, Springer, vol. 176(3), pages 529-555, September.
    8. Marcus Ingholt, 2018. "LTV vs. DTI Constraints: When Did They Bind, and How Do They Interact?," 2018 Meeting Papers 866, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • 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

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