Collateral Shocks: A Dominant Source of U.S. Business Cycles?

Mamoon Kader (mamoon.u.kader@gmail.com) and Hashmat Khan
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Hashmat Khan: Carleton University

No 24-07, Working Papers from Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management

Abstract: Are collateral shocks the dominant source of U.S. business cycles? We show that the evidence is not strong enough to conclude that they are. Collateral shocks, as described in Becard and Gauthier (2022), which tighten bank lending standards for both households and firms, account for only 7 percent of the cyclical variation in output, and 1 percent of consumption, over the period from 1985:Q1 to 2009:Q3. During this time, lending standards for both households and firms were the most closely aligned in the data. Additionally, we observe a significant dampening in the comovement between consumption and output. Through counterfactual exercises, we isolate the role of estimated collateral shocks and model parameters to explain the findings. Our results suggest that identifying a quantitatively significant financial shock, which drives the U.S. business cycle and also accounts for consumption dynamics, remains a challenging task.

Keywords: collateral shocks; bank lending standards; output; consumption (search for similar items in EconPapers)
JEL-codes: E21 E23 E24 E32 E44 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2024-07, Revised 2024-07
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Working Paper: Collateral Shocks: A Dominant Source of U.S. Business Cycles? (2024)
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