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Deepening Contractions and Collateral Constraints

Author

Listed:
  • Jensen, Henrik
  • Ravn, Søren Hove
  • Santoro, Emiliano
Abstract
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.

Suggested Citation

  • Jensen, Henrik & Ravn, Søren Hove & Santoro, Emiliano, 2016. "Deepening Contractions and Collateral Constraints," CEPR Discussion Papers 11166, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11166
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit constraints; Business cycles; Skewness; Deleveraging;
    All these keywords.

    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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