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Decoupling and Recoupling

  • Anton Korinek
  • Agustín Roitman
  • Carlos A. Végh

We develop a stylized model that captures the phenomena of decoupling and recoupling in an environment where heterogeneous entrepreneurial sectors face financial constraints in their relationship with a common set of lenders. In response to adverse shocks, a financially constrained sector must reduce its borrowing and cut down on production. In particular, as the constrained sector absorbs less and less capital, the real interest rate in the economy declines. Other sectors that compete for the same inputs (including capital) thus experience lower costs, which boosts investment, output, and profits, reflecting the phenomenon of "decoupling." As long as the shock is small, the entrepreneurial sector repays what is owed and the lenders' ability to supply funds is unaffected. For large shocks, however, the constrained sector is no longer able to honor its debts in full and lenders experience losses that erode their lending base. This induces them to cut their supply of credit to the rest of the economy, which reduces output and profit for all other entrepreneurial sectors, capturing the phenomenon of "recoupling" or contagion.

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File URL: http://www.nber.org/papers/w15907.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15907.

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Date of creation: Apr 2010
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Publication status: published as Anton Korinek & Agustin Roitman & Carlos A. V�gh, 2010. "Decoupling and Recoupling," American Economic Review, American Economic Association, vol. 100(2), pages 393-97, May.
Handle: RePEc:nbr:nberwo:15907
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  1. Dooley, Michael & Hutchison, Michael, 2009. "Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling-recoupling hypothesis," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1331-1349, December.
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