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Business Cycles and Leverage in Collateral Constraints

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Authors
Nah, Won Jun
Issue Date
2010-10
Publisher
Institute of Economic Research, Seoul National University
Citation
Seoul Journal of Economics, Vol.23 No.4, pp. 491-532
Keywords
Credit cyclesCollateral constraintsFinancial leverageAmplificationPersistence
Abstract
This paper develops a simple dynamic stochastic general equilibrium model with collateral constraints to explore the business cycle implications of financial leverage. From the model-based experiments,

the degree of leverage is shown to be an important factor in amplifying the effects of collateral constraints. This finding suggests that financial leverage may affect the real economy in nonneutral ways in the course of business fluctuations. Moreover, instead of the interactions between investment and collateral price,the endogenous accumulation of collateral asset is shown to be an alternative channel through which the business cycle effects of the collateral constraints are generated. From the model simulations, we find it difficult to have both significant ification and significant persistence at the same time. This is due to the different response patterns of investment and consumption, which are consistent with the intertemporal optimizing behaviors.
ISSN
1225-0279
Language
English
URI
https://hdl.handle.net/10371/71646
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College of Social Sciences (사회과학대학)Institute of Economics Research (경제연구소)Seoul Journal of EconomicsSeoul Journal of Economics vol.23 no.1~4 (2010)
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