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Aggregate implications of a credit crunch: the importance of heterogeneity

Buera, Francisco J. and Moll, Benjamin (2015) Aggregate implications of a credit crunch: the importance of heterogeneity. American Economic Journal: Macroeconomics, 7 (3). 1 - 42. ISSN 1945-7707

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Identification Number: 10.1257/mac.20130212

Abstract

We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the form of underlying heterogeneity. We find that in all three model variants a credit crunch shows up as a different wedge: efficiency, investment, and labor wedges. Furthermore, all three model variants have an undistorted Euler equation for the aggregate of firm owners. These results highlight the limitations of using representative agent models to identify sources of business cycle fluctuations.

Item Type: Article
Official URL: https://www.aeaweb.org/journals/mac
Additional Information: © 2015 The Authors
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E23 - Production
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
Date Deposited: 05 Nov 2019 16:51
Last Modified: 20 Nov 2019 12:47
URI: http://eprints.lse.ac.uk/id/eprint/102391

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