American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Leverage and Deepening Business-Cycle Skewness
American Economic Journal: Macroeconomics
vol. 12,
no. 1, January 2020
(pp. 245–81)
Abstract
We document that the United States and other G7 economies have 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. Improved access to credit increases the likelihood that financial constraints become nonbinding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, however, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially driven expansions lead to deeper contractions, as compared with equally-sized nonfinancial expansions.Citation
Jensen, Henrik, Ivan Petrella, Søren Hove Ravn, and Emiliano Santoro. 2020. "Leverage and Deepening Business-Cycle Skewness." American Economic Journal: Macroeconomics 12 (1): 245–81. DOI: 10.1257/mac.20170319Additional Materials
JEL Classification
- D14 Household Saving; Personal Finance
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy