Leverage, Financial and Business Cycles

This paper provides pioneering estimates of the impact of loan-to-value (LTV) ratios, also known as leverage, on economic growth in Bolivia. The analysis reveals the pro-cyclicality between the economic and financial cycles, confirming the stylized facts. We emphasize the significance of recognizing the interplay between these cycles to attain greater stability and foster economic growth. The findings suggest that shocks in the loan-to-value (LTV) ratios trigger a rise in housing prices and greater consumption by entrepreneurs, leading to an increase in economic growth and employment levels. However, we also confirm the notion that leverage can be a double-edged tool, as its excessive utilization can disrupt markets and destabilize the overall economy