How Important Are Asset Price Fluctuations for Business Investment?

Abstract: Previous recessions in the U.S. revealed to economists and policymakers that weak macroeconomic conditions may have been worsened by financial distress. Economists have theorized that this association is explained by a decline in physical asset prices that often precede recessions. When physical asset prices decline, firms pledge less-valuable assets to banks, which leads banks to reduce lending. Consequently, firms are not able to finance their investments, which reduces overall economic activity. In this article, we review more recent literature that may indicate that this mechanism is weaker than once believed.

Keywords: macroeconomics; physical asset prices; investment cycles; recessions;

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Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2023-02

Volume: 23

Issue: 05