Deepening Contractions and Collateral Constraints
Research output: Working paper › Research
The skewness of the US business cycle has become increasingly negative over the last decades. This finding can be explained by the concurrent increases in the loan-to-value ratios of both households and firms. To demonstrate this point, we devise a DSGE model with collateralized borrowing and occasionally non-binding credit constraints. Easier credit access increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplified due to tighter constraints. As a result, busts gradually become deeper than booms. Based on the differential impact that occasionally non-binding constraints exert on the shape of expansions and contractions, we are also able to reconcile a more negatively skewed business cycle with a moderation in its volatility. Finally, our model can account for an intrinsic feature of economic downturns preceded by private credit build-ups: Financially driven expansions lead to deeper contractions, as compared to equally-sized non-financial expansions.
Original language | English |
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Place of Publication | London |
Publisher | Centre for Economic Policy Research, CEPR |
Publication status | Published - Mar 2016 |
Series | CEPR Discussion Paper Series |
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Number | 11166 |
Volume | 2016 |
Bibliographical note
Jel Classification: E32, E44
- Faculty of Social Sciences - E32, E44
Research areas
Links
- http://cepr.org/active/publications/discussion_papers/dp.php?dpno=11166
Submitted manuscript
ID: 157501717