 Financial crises with different collateral typesRohan Shah Journal of Economic Dynamics and Control, 2024, vol. 166, issue C Abstract: Firms borrow against earnings more than they do against their assets. How does this affect the aggregate response to financial crises? I take a dynamic stochastic general equilibrium model of heterogeneous firms that choose their capital and debt subject to a borrowing constraint and examine the recovery from a financial crisis when firms can use different types of collateral. I compare between two collateral types: assets, and earnings. I find that when firms borrow against earnings recessions are deeper, but recoveries are quicker compared to when firms borrow against assets. I also find that neither type of collateral can, by itself, completely explain the recovery from the Great Recession. Instead, the path of investment after the 2007-2008 Financial crisis is better captured by firms borrowing against earnings than by firms borrowing against assets, but this is reversed when looking at the path of output. This suggests that a combination of collateral types is required to fully capture the recovery from the Great Recession. Keywords: Financial crisis; Collateral constraints; Financial frictions; Heterogeneity; Earnings as collateral (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:166:y:2024:i:c:s0165188924001076 DOI: 10.1016/j.jedc.2024.104915 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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