Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of New York
Staff Reports
Good news is bad news: leverage cycles and sudden stops
Ozge Akinci
Ryan Chahrour
Abstract

We show that a model with imperfectly forecastable changes in future productivity and an occasionally binding collateral constraint can match a set of stylized facts about “sudden stop” events. “Good” news about future productivity raises leverage during times of expansion, increasing the probability that the constraint binds, and a sudden stop occurs, in future periods. The economy exhibits a boom period in the run-up to the sudden stop, with output, consumption, and investment all above trend, consistent with the data. During the sudden stop, the nonlinear effects of the constraint induce output, consumption, and investment to fall substantially below trend, as they do in the data.


Download Full text
Cite this item
Ozge Akinci & Ryan Chahrour, Good news is bad news: leverage cycles and sudden stops, Federal Reserve Bank of New York, Staff Reports 738, 01 Sep 2015.
More from this series
JEL Classification:
Subject headings:
Keywords: news shocks; sudden stops; leverage; boom-bust cycle
For corrections, contact Amy Farber ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal