Decoupling and Recoupling

16 Pages Posted: 19 Apr 2010 Last revised: 29 Oct 2014

See all articles by Anton Korinek

Anton Korinek

University of Virginia - Department of Economics and Darden School of Business; National Bureau of Economic Research (NBER)

Agustin Roitman

affiliation not provided to SSRN

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)

Date Written: April 2010

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.

Suggested Citation

Korinek, Anton and Roitman, Agustin and Vegh, Carlos A., Decoupling and Recoupling (April 2010). NBER Working Paper No. w15907, Available at SSRN: https://ssrn.com/abstract=1590717

Anton Korinek (Contact Author)

University of Virginia - Department of Economics and Darden School of Business ( email )

248 McCormick Rd
Charlottesville, VA 22904
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Agustin Roitman

affiliation not provided to SSRN

No Address Available

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

University of California at Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-825-7371 (Phone)
310-825-9528 (Fax)

HOME PAGE: http://vegh.sscnet.ucla.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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