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Capital over the business cycle: renting versus ownership

  • Gal, Peter

    ()

    (Tinbergen Institute and OECD)

  • Pinter, Gabor

    ()

    (Bank of England)

We find that capital renting makes up one fifth of US capital expenditures, and it increases during downturns. Further, we present cross-country evidence that output losses after financial crises are smaller where renting is more prevalent. To understand these findings, we build a general equilibrium model with borrowing constraints and with the option to rent or buy capital. The countercyclicality of rentals occurs because their supply increases, as renting serves as an additional means of savings when credit markets malfunction. Moreover, demand also shifts towards rentals as they become relatively cheaper. By absorbing excess savings, renting mitigates financial crises.

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Paper provided by Bank of England in its series Bank of England working papers with number 478.

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Length: 51 pages
Date of creation: 16 Aug 2013
Date of revision:
Handle: RePEc:boe:boeewp:0478
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  1. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  2. Zheng Liu & Pengfei Wang & Tao Zha, 2011. "Land-price dynamics and macroeconomic fluctuations," NBER Working Papers 17045, National Bureau of Economic Research, Inc.
  3. Gavazza, Alessandro, 2010. "Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft," MPRA Paper 28821, University Library of Munich, Germany.
  4. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
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  6. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  7. Lewis, Craig M. & Schallheim, James S., 1992. "Are Debt and Leases Substitutes?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 497-511, December.
  8. Adriano Rampini & Andrea Eisfeldt, 2007. "Leasing, Ability to Repossess, and Debt Capacity," Working Papers 07-19, Center for Economic Studies, U.S. Census Bureau.
  9. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  10. Lorenzoni, Guido & Walentin, Karl, 2007. "Financial Frictions, Investment and Tobin’s q," Working Paper Series 208, Sveriges Riksbank (Central Bank of Sweden).
  11. Gavazza, Alessandro, 2010. "Asset liquidity and financial contracts: Evidence from aircraft leases," Journal of Financial Economics, Elsevier, vol. 95(1), pages 62-84, January.
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