Sudden Stops, Financial Crises and Leverage: A Fisherian Deflation of Tobin's Q

Enrique Mendoza

No 14444, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin's Q driven by Irving Fisher's debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.

JEL-codes: D52 E32 E44 F32 F41 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-opm
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as Enrique G Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, vol 100(5), pages 1941-1966.

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Working Paper: Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q* (2008)
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