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Leverage and Deepening Business Cycle Skewness

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  • Jensen, Henrik
  • Petrella, Ivan
  • Ravn, S�ren Hove
  • Santoro, Emiliano

Abstract

We document that the U.S. economy has 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. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplified 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, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.

Suggested Citation

  • Jensen, Henrik & Petrella, Ivan & Ravn, S�ren Hove & Santoro, Emiliano, 2017. "Leverage and Deepening Business Cycle Skewness," CEPR Discussion Papers 12239, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12239
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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 2019-05-13 13:27:44
    2. Leverage and deepening business cycle skewness
      by Christian Zimmermann in NEP-DGE blog on 2017-10-17 05:29:42

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    Cited by:

    1. 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.
    2. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2020. "Disasters Everywhere: The Costs of Business Cycles Reconsidered," Staff Reports 925, Federal Reserve Bank of New York.
    3. Isabel Cairo & Jae Sim, 2017. "Income Inequality, Financial Crises and Monetary Policy," 2017 Meeting Papers 1433, Society for Economic Dynamics.
    4. 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

    Keywords

    Business Cycles; credit constraints; deleveraging.; Skewness;

    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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