By Henrik Jensen, Ivan Petrella, Soren Ravn and Emiliano Santoro
We document that the U.S. and other G7 economies have been characterized by an increasingly negative business cycle asymmetry over the last three decades. This finding can be explained by the concurrent increase in the financial leverage of households and firms. To support this view, we devise and estimate a dynamic general equilibrium model with collateralized borrowing and occasionally binding credit constraints. Improved access to credit increases the likelihood that financial constraints become non-binding in the face of expansionary shocks, allowing agents to freely substitute intertemporally. Contractionary shocks, on the other hand, are further amplified by drops in collateral values, since constraints remain binding. As a result, booms become progressively smoother and more prolonged than busts. Finally, in line with recent empirical evidence, financially-driven expansions lead to deeper contractions, as compared with equally-sized non-financial expansions.
The paper makes a lot of sense, yet I am feeling uneasy about it. Can we really conclude that there is a new trend based on a handful of data points (recessions)? Usually, we ask for more data to say something has changed in the economy. Of course, this is a criticism that is not specific to this paper.