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Leverage and deepening business cycle skewness

Author

Listed:
  • Henrik Jensen

    () (University Of Copenhagen and CEPR)

  • Ivan Petrella

    () (University of Warwick and CEPR)

  • Søren Hove Ravn

    () (University of Copenhagen)

  • Emiliano Santoro

    () (University of Copenhagen)

Abstract

We document that the U.S. economy has been characterized by an increasingly negative business cycle asymmetry over the last three decades. This fi nding can be explained by the concurrent increase in the fi nancial leverage of households and fi rms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplifi ed due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, fi nancially-driven expansions lead to deeper contractions, as compared with equally-sized non-fi nancial expansions.

Suggested Citation

  • Henrik Jensen & Ivan Petrella & Søren Hove Ravn & Emiliano Santoro, 2017. "Leverage and deepening business cycle skewness," Working Papers 1732, Banco de España.
  • Handle: RePEc:bde:wpaper:1732
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    References listed on IDEAS

    as
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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. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2020. "Disasters Everywhere: The Costs of Business Cycles Reconsidered," NBER Working Papers 26962, National Bureau of Economic Research, Inc.
    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. Joël Cariolle & Petros Sekeris, 2021. "How export shocks corrupt: theory and evidence," Working Papers hal-03164648, HAL.
    7. Cyril Couaillier & Valerio Scalone, 2020. "How does Financial Vulnerability amplify Housing and Credit Shocks?," Working papers 763, Banque de France.
    8. 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.
    9. Marcus Ingholt, 2018. "LTV vs. DTI Constraints: When Did They Bind, and How Do They Interact?," 2018 Meeting Papers 866, Society for Economic Dynamics.
    10. Fève, Patrick & Sanchez, Pablo Garcia & Moura, Alban & Pierrard, Olivier, 2021. "Costly default and skewed business cycles," European Economic Review, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    credit constraints; business cycles; skewness; deleveraging;
    All these keywords.

    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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