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Aggregate Implications of a Credit Crunch

  • Francisco J. Buera
  • Benjamin Moll

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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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
Date of revision:
Handle: RePEc:nbr:nberwo:17775
Note: EFG
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  1. Francisco J. Buera & Yongseok Shin, 2006. "Financial Frictions and the Persistence of History," 2006 Meeting Papers 792, Society for Economic Dynamics.
  2. Jordi Galí & Frank Smets & Rafael Wouters, 2011. "Unemployment in an Estimated New Keynesian Model," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 329-360 National Bureau of Economic Research, Inc.
  3. 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.
  4. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2009. "The establishment-level behavior of vacancies and hiring," Working Papers 09-14, Federal Reserve Bank of Philadelphia.
  5. 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.
  6. Aubhik Khan & Julia K. Thomas, 2013. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1055 - 1107.
  7. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2008. "Investment Shocks and Business Cycles," CEPR Discussion Papers 6739, C.E.P.R. Discussion Papers.
  8. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  9. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  10. 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.
  11. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
  12. Parkin, M., 1988. "A Method For Determining Whether Parameters In Aggregative Models Are Structural," UWO Department of Economics Working Papers 8803, University of Western Ontario, Department of Economics.
  13. Mark Wright & Guido Sandleris, 2008. "On the cost of financial crises," 2008 Meeting Papers 180, Society for Economic Dynamics.
  14. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," RCER Working Papers 556, University of Rochester - Center for Economic Research (RCER).
  15. Ariel Zetlin-Jones & Ali Shourideh, 2012. "External Financing and the Role of Financial Frictions over the Business Cycle: Measurement and Theory," 2012 Meeting Papers 321, Society for Economic Dynamics.
  16. Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
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