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Slow recoveries: Any role for corporate leverage?

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  • Smets, Frank
  • Villa, Stefania

Abstract

This paper examines whether financial conditions of the non-financial corporate sector can explain why the recovery from recessions in the United States is slower since the mid-1980s. Leverage by the corporate sector has increased significantly since the financial deregulation of the mid-1980s. Empirical evidence shows that slow recoveries are associated with a significant drop in the growth rates of investment and bank loans, and with a surge in the growth rates of corporate bonds. In an estimated dynamic stochastic general equilibrium model with a financial accelerator, counterfactual experiments based on estimates of two samples – 1965–1983 and 1984–2007 – show that the non-financial corporate indebtedness affects only marginally the speed of the recovery in the two samples.

Suggested Citation

  • Smets, Frank & Villa, Stefania, 2016. "Slow recoveries: Any role for corporate leverage?," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 54-85.
  • Handle: RePEc:eee:dyncon:v:70:y:2016:i:c:p:54-85
    DOI: 10.1016/j.jedc.2016.06.003
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    More about this item

    Keywords

    Speed of recoveries; Indebtedness; Financial frictions; Estimated DSGE model;

    JEL classification:

    • 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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