Macroeconomic adjustment under loose financing conditions in the construction sector

Oscar Arce (), José Manuel Campa and Ángel Gavilán

European Economic Review, 2013, vol. 59, issue C, 19-34

Abstract: We provide a model with sector-specific debt-collateral constraints to analyze how asymmetric financing conditions across sectors affect the aggregate investment, credit and output composition. In our model, investments in the construction sector allow for higher leverage than investments in the non-durable consumption goods sector. When borrowing constraints bind in both sectors, unit returns in the construction sector are lower due to a positive pledgeability premium, and changes in interest rates have a non-monotonic effect in the sectoral composition of investment. Specifically, a fall in interest rates triggers a relative rise in investment in the consumption goods sector when rates are relatively high, whereas the opposite effect obtains when rates are sufficiently low. We argue that this prediction of the model, which depends critically on the asymmetries of financing conditions across sectors, is consistent with the evidence for a number of OECD countries during the decade before the 2007/2008 crisis

Keywords: Investment and credit; Pledgeability premium; Collateral constraints; Sectoral allocation; Housing (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Macroeconomic Adjustment under Loose Financing Conditions in the Construction Sector (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:59:y:2013:i:c:p:19-34

DOI: 10.1016/j.euroecorev.2012.11.004

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