Sudden Stops, Financial Crises, and Leverage
- (pp. 1941-66)
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)Citation
Mendoza, Enrique G. 2010. "Sudden Stops, Financial Crises, and Leverage." American Economic Review, 100 (5): 1941-66. DOI: 10.1257/aer.100.5.1941Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- O11 Macroeconomic Analyses of Economic Development
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance