Leverage and Deepening Business Cycle Skewness

Abstract

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Costly default and skewed business cycles

“…We also analyze the relationship between structural parameters and cyclical skewness in our model. In particular, we show that asymmetry in quantities increases with the strength of the financial friction, in line with the findings of Jensen, Ravn, and Santoro (2018) and Jensen, Petrella, Ravn, and Santoro (2019). Finally, we numerically compute the welfaremaximizing regulation scheme and show that it strongly reduces the occurrence of default in the economy, as well as macroeconomic asymmetry.…”

“…1 This pattern, which generates negative asymmetry (or negative skewness), has been documented by a number of authors, including Neftci (1984), Hamilton (1989), and Morley and Piger (2012). It also appears to be strengthening: recent work by Jensen, Petrella, Ravn, and Santoro (2019) finds that the skewness of US business cycles has become increasingly negative since the mid-1980s. These authors suggest that financial factors, in the form of rising private-sector leverage associated with occasionally binding borrowing constraints, can account for this surge in asymmetry.…”

Why are Fiscal Multipliers Asymmetric? The Role of Credit Constraints

“…For example, Jensen et al . (2020) document a negative skewness in business cycles and find that this skewness has been increasing over time in the USA. Jensen et al .…”

Income Inequality, Financial Crises, and Monetary Policy

“…The nature of asymmetric distributions in our framework is comparable to Dupraz et al (2017), who generate an asymmetric distribution of the unemployment rate by combining downward nominal wage rigidity and search frictions but abstract from income inequality and financial crises. Relatedly, Kocherlakota (2000) and Jensen et al (2017) show that occasionally binding financial constraints in a highly leveraged economy can be an important source of business cycle asymmetries. While our paper also highlights the role of credit in generating asymmetric distributions, Kocherlakota (2000) and Jensen et al (2017) abstract from nominal rigidities, which prevent the study of monetary policy.…”

“…Relatedly, Kocherlakota (2000) and Jensen et al (2017) show that occasionally binding financial constraints in a highly leveraged economy can be an important source of business cycle asymmetries. While our paper also highlights the role of credit in generating asymmetric distributions, Kocherlakota (2000) and Jensen et al (2017) abstract from nominal rigidities, which prevent the study of monetary policy. Importantly, to the best of our knowledge, the interaction between financial crises and the binding ZLB constraint in our paper is only found in Guerrieri and Lorenzoni (2017).…”