Working Paper: NBER ID: w15907
Authors: Anton Korinek; Agustín Roitman; Carlos A. Végh
Abstract: We develop a stylized model that captures the phenomena of decoupling and recoupling in an environment where heterogeneous entrepreneurial sectors face financial constraints in their relationship with a common set of lenders. In response to adverse shocks, a financially constrained sector must reduce its borrowing and cut down on production. In particular, as the constrained sector absorbs less and less capital, the real interest rate in the economy declines. Other sectors that compete for the same inputs (including capital) thus experience lower costs, which boosts investment, output, and profits, reflecting the phenomenon of "decoupling." As long as the shock is small, the entrepreneurial sector repays what is owed and the lenders' ability to supply funds is unaffected. For large shocks, however, the constrained sector is no longer able to honor its debts in full and lenders experience losses that erode their lending base. This induces them to cut their supply of credit to the rest of the economy, which reduces output and profit for all other entrepreneurial sectors, capturing the phenomenon of "recoupling" or contagion.
Keywords: Decoupling; Recoupling; Financial Constraints; Entrepreneurial Sectors
JEL Codes: E44; F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financially constrained sector reduces borrowing (G21) | decline in real interest rate (E43) |
| decline in real interest rate (E43) | increase in investment and profits in other sectors (E22) |
| financially constrained sector defaults on debts (G33) | lender losses (G21) |
| lender losses (G21) | reduction in credit supply (E51) |
| reduction in credit supply (E51) | negative impact on other entrepreneurial sectors (F69) |
| financially constrained sector reduces borrowing (G21) | increase in investment and profits in other sectors (E22) |
| financially constrained sector defaults on debts (G33) | recoupling or contagion (F65) |