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Aggregate Implications of a Credit Crunch

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  • Francisco J. Buera
  • Benjamin Moll

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17775.

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Date of creation: Jan 2012
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Handle: RePEc:nbr:nberwo:17775

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References

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  1. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2008. "Investment shocks and business cycles," Working Paper Series WP-08-12, Federal Reserve Bank of Chicago.
  2. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
  3. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
  4. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Unemployment in an Estimated New Keynesian Model," National Bank of Poland Working Papers 106, National Bank of Poland, Economic Institute.
  5. Julia K. Thomas & Aubhik Khan, 2010. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," 2010 Meeting Papers 801, Society for Economic Dynamics.
  6. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," NBER Working Papers 16401, National Bureau of Economic Research, Inc.
  7. Parkin, Michael, 1988. "A method for determining whether parameters in aggregative models are structural," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 215-252, January.
  8. Steven J. Davis & R. Jason Faberman & John C. Haltiwanger, 2009. "The establishment-level behavior of vacancies and hiring," Working Papers 09-14, Federal Reserve Bank of Philadelphia.
  9. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
  10. Mark Wright & Guido Sandleris, 2008. "On the cost of financial crises," 2008 Meeting Papers 180, Society for Economic Dynamics.
  11. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  12. Giuseppe Moscarini & Fabien Postel-Vinay, 2010. "Unemployment and Small Cap Returns: The Nexus," American Economic Review, American Economic Association, vol. 100(2), pages 333-37, May.
  13. Yongsung Chang & Sun-Bin Kim, 2007. "Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations," American Economic Review, American Economic Association, vol. 97(5), pages 1939-1956, December.
  14. Francisco J. Buera & Yongseok Shin, 2006. "Financial Frictions and the Persistence of History," 2006 Meeting Papers 792, Society for Economic Dynamics.
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Cited by:
  1. George-Marios Angeletos & Luigi Iovino & Jennifer La'O, 2011. "Cycles, Gaps, and the Social Value of Information," NBER Working Papers 17229, National Bureau of Economic Research, Inc.
  2. Ajello, Andrea, 2010. "Financial intermediation, investment dynamics and business cycle fluctuations," MPRA Paper 32447, University Library of Munich, Germany, revised Mar 2011.
  3. Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
  4. Ezra Oberfield, 2012. "Online Appendix to "Productivity and Misallocation During a Crisis: Evidence from the Chilean Crisis of 1982"," Technical Appendices 11-215, Review of Economic Dynamics.
  5. Caterina Mendicino, 2012. "Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy," Working Papers w201211, Banco de Portugal, Economics and Research Department.
  6. JaeBin Ahn & Alexander McQuoid, 2013. "Capacity Constrained Exporters: Micro Evidence and Macro Implications," Working Papers 1301, Florida International University, Department of Economics.
  7. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," NBER Working Papers 18102, National Bureau of Economic Research, Inc.
  8. Philip Arestis & Ana Rosa Gonzalez, 2013. "Endogenous Bank Credit and Its Link to Housing in OECD Countries," Economics Working Paper Archive wp_750, Levy Economics Institute, The.

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