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Slow Debt, Deep Recessions†

Slow Debt, Deep Recessions† AbstractBusiness credit lags GDP growth by about one year. This contributes to high leverage during recessions and slow deleveraging. We show that a model in which firms use risky long-term debt replicates this slow adjustment of firm debt. In the model, slow-moving debt has important effects for real activity. High levels of firm debt issued during expansions are only gradually reduced during recessions. This generates an adverse feedback loop between high default rates and low investment and thereby amplifies the downturn. Sluggish deleveraging slows down the recovery. (JEL E23, E32, E44, G31, G32) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Slow Debt, Deep Recessions†

Slow Debt, Deep Recessions†

American Economic Journal: Macroeconomics , Volume 14 (1) – Jan 1, 2022

Abstract

AbstractBusiness credit lags GDP growth by about one year. This contributes to high leverage during recessions and slow deleveraging. We show that a model in which firms use risky long-term debt replicates this slow adjustment of firm debt. In the model, slow-moving debt has important effects for real activity. High levels of firm debt issued during expansions are only gradually reduced during recessions. This generates an adverse feedback loop between high default rates and low investment and thereby amplifies the downturn. Sluggish deleveraging slows down the recovery. (JEL E23, E32, E44, G31, G32)

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Publisher
American Economic Association
Copyright
Copyright © 2022 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20190306
Publisher site
See Article on Publisher Site

Abstract

AbstractBusiness credit lags GDP growth by about one year. This contributes to high leverage during recessions and slow deleveraging. We show that a model in which firms use risky long-term debt replicates this slow adjustment of firm debt. In the model, slow-moving debt has important effects for real activity. High levels of firm debt issued during expansions are only gradually reduced during recessions. This generates an adverse feedback loop between high default rates and low investment and thereby amplifies the downturn. Sluggish deleveraging slows down the recovery. (JEL E23, E32, E44, G31, G32)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jan 1, 2022

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