2010
DOI: 10.1257/aer.100.5.1941
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Sudden Stops, Financial Crises, and Leverage

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 allo… Show more

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Cited by 829 publications
(626 citation statements)
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“…At equilibrium, this vicious circle results in a complete collapse of trades. Therefore, similarly to Cao (2010) and Lin et al (2010), we show that the debt-deflation channel still operates in a closedeconomy with endogenous interest rates, as opposed to exogenous interest rates in a small open economy as in Mendoza (2010). Moreover, while in Cao (2010), debtdeflation occurs when a bad shock hits the economy, here, in a position more similar to Lin et al (2010), it results from the monetary policy itself.…”
Section: The Monetary Dilemmasupporting
confidence: 69%
See 1 more Smart Citation
“…At equilibrium, this vicious circle results in a complete collapse of trades. Therefore, similarly to Cao (2010) and Lin et al (2010), we show that the debt-deflation channel still operates in a closedeconomy with endogenous interest rates, as opposed to exogenous interest rates in a small open economy as in Mendoza (2010). Moreover, while in Cao (2010), debtdeflation occurs when a bad shock hits the economy, here, in a position more similar to Lin et al (2010), it results from the monetary policy itself.…”
Section: The Monetary Dilemmasupporting
confidence: 69%
“…Our approach is related to the work on the debt deflation theory of Sudden Stops (Mendoza, 2006(Mendoza, , 2010Mendoza and Smith, 2006). They introduce collateral constraints in an RBC model of a Small Open Economy to show that when debt is sufficiently high, an adverse productivity shock triggers the constraints and results in a fire-sale spiral, falling prices and a reduction in output.…”
Section: Related Literaturementioning
confidence: 99%
“…In addition, it would be interesting to consider collateral constraints in which asset prices, for instance house prices, play a role in determining access to credit. Mendoza (2010) Also the numerical solution to the model with multi-period wage rigidities is derived using the method described above. However, the presence of another endogenous state variable, the period 0 nominal wage, for the periods in which wages are partly rigid increases significantly the time needed to obtain a numerical solution.…”
Section: Resultsmentioning
confidence: 99%
“…4 Mendoza (2010) is one prominent recent example. M A N U S C R I P T ACCEPTED MANUSCRIPT 5 imbalances.…”
Section: Accepted Manuscriptmentioning
confidence: 99%