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Financial Markets and Fluctuations in Uncertainty

Author Info

Listed author(s):
  • Yan Bai

    (Arizona State University)

  • Patrick Kehoe

    (Princeton University)

  • Cristina Arellano

    (Federal Reserve Bank of Minneapolis)

Abstract

Researchers have documented that in the recent financial crisis the large decline in economic activity and credit has been accompanied by a large increase in the dispersion of growth rates across firms. We build a quantitative general equilibrium model in which financial frictions interact with increases in uncertainty at the firm level to generate a contraction in economic activity and a large increase in the dispersion of growth rates across firms. We find that our model can generate about 67% of the decline in output of the Great Recession of 2007. A promising feature of our model is that it generates large labor wedges, a feature of the recent data on business cycles.

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File URL: https://economicdynamics.org/meetpapers/2011/paper_896.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 896.

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Date of creation: 2011
Handle: RePEc:red:sed011:896
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Andrew B. Abel & Janice C. Eberly, 1996. "Optimal Investment with Costly Reversibility," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 581-593.
  2. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  3. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, 03.
  4. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
  5. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
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Cited by:

  1. Ryan A. Decker & Pablo N. D'Erasmo & Hernan Moscoso Boedo, 2016. "Market Exposure and Endogenous Firm Volatility over the Business Cycle," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 148-198, January.
  2. Marc Joëts & Valérie Mignon & Tovonony Razafindrabe, 2015. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," EconomiX Working Papers 2015-7, University of Paris West - Nanterre la Defense, EconomiX.
  3. Leduc, Sylvain & Liu, Zheng, 2016. "Uncertainty shocks are aggregate demand shocks," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 20-35.
  4. Scalice, Régis Kovacs & da Silva, José Oliveira & Ostetto, Jaqueline Nazario & de Paula, Gabriele Aguiar, 2015. "Modular deployment using TRM and function analysis," Technological Forecasting and Social Change, Elsevier, vol. 92(C), pages 1-11.
  5. Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2013. "Measuring the Financial Soundness of U.S. Firms, 1926-2012," NBER Working Papers 19204, National Bureau of Economic Research, Inc.
  6. Damiano Sandri & Fabian Valencia, 2012. "Balance-Sheet Shocks and Recapitalizations," IMF Working Papers 12/68, International Monetary Fund.
  7. Fabian Valencia, 2013. "Aggregate Uncertainty and the Supply of Credit," IMF Working Papers 13/241, International Monetary Fund.
  8. Johnson, Timothy C. & Lee, Jaehoon, 2014. "On the systematic volatility of unpriced earnings," Journal of Financial Economics, Elsevier, vol. 114(1), pages 84-104.

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