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Leverage and Deepening Business-Cycle Skewness

Henrik Jensen (), Ivan Petrella (), Søren Hove Ravn and Emiliano Santoro

American Economic Journal: Macroeconomics, 2020, vol. 12, issue 1, 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.

JEL-codes: D14 E23 E32 E44 (search for similar items in EconPapers)
Date: 2020
Note: DOI: 10.1257/mac.20170319
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Related works:
Working Paper: Leverage and Deepening Business Cycle Skewness (2019) Downloads
Working Paper: Leverage and deepening business cycle skewness (2017) Downloads
Working Paper: Leverage and Deepening Business Cycle Skewness (2017) Downloads
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