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Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity

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  • Aubhik Khan
  • Julia K. Thomas

Abstract

We study the cyclical implications of credit market imperfections in a quantitative dynamic, stochastic general equilibrium model wherein firms face persistent shocks to aggregate and individual productivity. In our model economy, optimal capital reallocation is distorted by two frictions: collateralized borrowing and partial investment irreversibility. We find that a negative shock to borrowing conditions can, on its own, generate a large and persistent recession through disruptions to the distribution of capital. This recession, and the subsequent recovery, is distinguished both quantitatively and qualitatively from that driven by an exogenous shock to total factor productivity.

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File URL: http://dx.doi.org/10.1086/674142
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File URL: http://dx.doi.org/10.1086/674142
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 121 (2013)
Issue (Month): 6 ()
Pages: 1055 - 1107

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Handle: RePEc:ucp:jpolec:doi:10.1086/674142
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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Find related papers by JEL classification:
  • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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