Sudden Stops, Financial Crises, and Leverage

Financial crashes were followed by deep recessions in the Sudden Stops of emerging economies. An equilibrium business cycle model with a collateral constraint explains this phenomenon as a result of the amplification and asymmetry that the constraint induces in the responses of macro-aggregates to s...

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Bibliographic Details
Published inThe American economic review Vol. 100; no. 5; pp. 1941 - 1966
Main Author Mendoza, Enrique G.
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.12.2010
Subjects
Asset valuation
Book value
Business cycles
Capital investments
Collateral
Consumption
Credit
Deflation
Economic crises
Economic crisis
Economic fluctuations
Economic models
Economic shock
Economic theory
Emerging markets
Equilibrium
Financial crisis
Financial leverage
GDP
Gross Domestic Product
International economics
Leverage
Macroeconomics
Recessions
Studies
Trends
Working capital
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Summary:Financial crashes were followed by deep recessions in the Sudden Stops of emerging economies. An equilibrium business cycle model with a collateral constraint explains this phenomenon as a result of the amplification and asymmetry that the constraint induces in the responses of macro-aggregates to shocks. Leverage rises during expansions, and when it rises enough it triggers the constraint, causing a Fisherian deflation that reduces credit and the price and quantity of collateral assets. Output and factor allocations fall because access to working capital financing is also reduced. Precautionary saving makes Sudden Stops low probability events nested within normal cycles, as observed in the data.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.100.5.1941