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Leverage and Deepening Business Cycle Skewness

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

No 12239, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We document that the U.S. economy has 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. Higher leverage increases the likelihood that constraints become slack in the face of expansionary shocks, while contractionary shocks are further amplified due to binding constraints. As a result, booms become progressively smoother and more prolonged than busts. We are therefore able to reconcile a more negatively skewed business cycle with the Great Moderation in cyclical volatility. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.

Keywords: Business Cycles; credit constraints; deleveraging.; Skewness (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-mac
Date: 2017-08
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Working Paper: Leverage and Deepening Business Cycle Skewness (2019) Downloads
Working Paper: Leverage and deepening business cycle skewness (2017) Downloads
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