Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity
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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. (JEL E22, E23, E32, E43, E44)Citation
Buera, Francisco J., and Benjamin Moll. 2015. "Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity." American Economic Journal: Macroeconomics, 7 (3): 1-42. DOI: 10.1257/mac.20130212Additional Materials
JEL Classification
- E22 Investment; Capital; Intangible Capital; Capacity
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
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