Sudden Stops, Financial Crises, and Leverage
Top Cited Papers
- 1 December 2010
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 100 (5), 1941-1966
- https://doi.org/10.1257/aer.100.5.1941
Abstract
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. (JEL E21, E23, E32, E44, G01, O11, O16)This publication has 26 references indexed in Scilit:
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