Solomon, Bernard Daniel (2010): Firm leverage, household leverage and the business cycle.
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This paper develops a macroeconomic model of the interaction between consumer debt and firm debt over the business cycle. I incorporate interest rate spreads generated by firm and household loan default risk into a real business cycle model. I estimate the model on US aggregate data. This allows me to analyse the quantitative importance of possible feedback effects between the debt levels of firms and households, and the relative contributions of financial and supply shocks to economic fluctuations. While firm level credit market frictions significantly amplify the response of investment to shocks, they do not amplify output responses. In general equilibrium, higher external financing spreads for households contribute to lower external financing spreads for firms, contrary to traditional Keynesian predictions. Furthermore, total factor productivity shocks remain an important source of business cycles in my model. They are responsible for 71 - 74% of the variance of output and 56 - 69% of the variance of consumption in the model. Financial shocks are important in explaining interest rate spreads and leverage ratios, but they account for less than 11% of the fluctuations in output. My results suggest that other factors, beyond credit market frictions on their own, are necessary to justify an important role for financial shocks in aggregate output fluctuations.
|Item Type:||MPRA Paper|
|Original Title:||Firm leverage, household leverage and the business cycle|
|Keywords:||Financial frictions; external finance premium; DSGE models; Bayesian estimation; business cycles|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General
|Depositing User:||Bernard-Daniel Solomon|
|Date Deposited:||08. Nov 2010 22:27|
|Last Modified:||13. Feb 2013 11:09|
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