Deepening Contractions and Collateral Constraints
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Deepening Contractions and Collateral Constraints. / Jensen, Henrik; Ravn, Søren Hove; Santoro, Emiliano.
London : Centre for Economic Policy Research, CEPR, 2016.Research output: Working paper › Research
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TY - UNPB
T1 - Deepening Contractions and Collateral Constraints
AU - Jensen, Henrik
AU - Ravn, Søren Hove
AU - Santoro, Emiliano
N1 - Jel Classification: E32, E44
PY - 2016/3
Y1 - 2016/3
N2 - 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.
AB - 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.
KW - Faculty of Social Sciences
KW - E32
KW - E44
M3 - Working paper
T3 - CEPR Discussion Paper Series
BT - Deepening Contractions and Collateral Constraints
PB - Centre for Economic Policy Research, CEPR
CY - London
ER -
ID: 157501717