TY  - JOUR
AU  - Mendoza, Enrique G
TI  - Sudden Stops, Financial Crises and Leverage: A Fisherian Deflation of Tobin's Q
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14444
PY  - 2008
Y2  - October 2008
DO  - 10.3386/w14444
UR  - http://www.nber.org/papers/w14444
L1  - http://www.nber.org/papers/w14444.pdf
N1  - Author contact info:
Enrique G. Mendoza
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215-898-7701
E-Mail: egme@sas.upenn.edu
AB  - This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin's Q driven by Irving Fisher's debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run.
ER  -