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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 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)
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Cites
Agency Costs, Net Worth, And Business Fluctuations
Bernanke, B., Gertler, M., Bernanke, B., & Gertler, M. (1988) · Unknown · doi:10.22004/ag.econ.292693 · Cited by 4,386
Cited by
Macroeconomic Effects of Financial Shocks
Jermann, U., & Quadrini, V. (2012) · American Economic Review · doi:10.1257/aer.102.1.238 · Cited by 1,205
Capital Allocation and Productivity in South Europe*
Gopinath, G., Kalemli-Özcan, Ş., Karabarbounis, L., & Villegas-Sanchez, C. (2017) · The Quarterly Journal of Economics · doi:10.1093/qje/qjx024 · Cited by 848
How do business and financial cycles interact?
Claessens, S., Kose, M. A., & Terrones, M. E. (2012) · Journal of International Economics · doi:10.1016/j.jinteco.2011.11.008 · Cited by 678
Systemic risk and the macroeconomy: An empirical evaluation
Giglio, S., Kelly, B., & Pruitt, S. (2016) · Journal of Financial Economics · doi:10.1016/j.jfineco.2016.01.010 · Cited by 555
The Pass-Through of Sovereign Risk
Bocola, L. (2016) · Journal of Political Economy · doi:10.1086/686734 · Cited by 386
Metadata
- Authors
- Mendoza, E. G.
- Venue
- American Economic Review
- Publisher
- American Economic Association
- Published
- 2010-12-01
- Volume
- 100
- Issue
- 5
- Pages
- 1941-1966
- ISSN
- 0002-8282 (ISSN-L)
- OpenAlex
- W1988153299
- Cited by
- 1,006
- References
- 1
- FWCI
- 105.09
- Type
- journal article
- Language
- en
- Open access
- closed
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
