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Heterogeneity and redistribution shocks in business cycles

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  • Keiichiro Kobayashi
  • Daichi Shirai

Abstract

This paper uses a simple heterogeneous-agent economy model to show that redistribution of wealth among heterogeneous agents can play a significant role in business cycle dynamics and financial crises. In an economy where firms with heterogeneous productivity operate under borrowing constraints, redistribution of wealth reproduces the key features of business cycle fluctuations such as persistence and nonlinearity in output and labor, and procyclicality in observed productivity. This model suggests the hypothesis that a redistribution shock may be one of the key driving forces of business cycles. The aggregate variables exhibit strong nonlinearity in both our model and the standard model: however, while the behavior of individual agents does not involve nonlinearity in our model, strong nonlinearity is assumed in the standard model.

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Bibliographic Info

Paper provided by The Canon Institute for Global Studies in its series CIGS Working Paper Series with number 14-004E.

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Length: 29
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:cnn:wpaper:14-004e

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  1. Andrea Pescatori & Murat Tasci, 2011. "Search Frictions and the Labor Wedge," Koç University-TUSIAD Economic Research Forum Working Papers 1113, Koc University-TUSIAD Economic Research Forum.
  2. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-97, January.
  3. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, vol. 18(4), pages 418-440, December.
  4. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  5. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-66, December.
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