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Slow recoveries: Any role for corporate leverage?

Frank Smets and Stefania Villa ()

Journal of Economic Dynamics and Control, 2016, vol. 70, issue C, 54-85

Abstract: This paper examines whether financial conditions of the non-financial corporate sector can explain why the recovery from recessions in the United States is slower since the mid-1980s. Leverage by the corporate sector has increased significantly since the financial deregulation of the mid-1980s. Empirical evidence shows that slow recoveries are associated with a significant drop in the growth rates of investment and bank loans, and with a surge in the growth rates of corporate bonds. In an estimated dynamic stochastic general equilibrium model with a financial accelerator, counterfactual experiments based on estimates of two samples – 1965–1983 and 1984–2007 – show that the non-financial corporate indebtedness affects only marginally the speed of the recovery in the two samples.

Keywords: Speed of recoveries; Indebtedness; Financial frictions; Estimated DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2016
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