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Financial Markets and Fluctuations in Uncertainty

Author

Listed:
  • 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.

Suggested Citation

  • Yan Bai & Patrick Kehoe & Cristina Arellano, 2011. "Financial Markets and Fluctuations in Uncertainty," 2011 Meeting Papers 896, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:896
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    File URL: https://economicdynamics.org/meetpapers/2011/paper_896.pdf
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    References listed on IDEAS

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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. Thomas F. Cooley & Vincenzo Quadrini, 2001. "Financial Markets and Firm Dynamics," American Economic Review, American Economic Association, vol. 91(5), pages 1286-1310, December.
    3. 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.
    4. 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, March.
    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. Pancost, N. Aaron & Robatto, Roberto, 2019. "The effects of capital requirements on good and bad risk-taking," ESRB Working Paper Series 104, European Systemic Risk Board.
    2. Quadrini, Vincenzo, 2017. "Bank liabilities channel," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 25-44.
    3. Atkeson, Andrew G. & Eisfeldt, Andrea L. & Weill, Pierre-Olivier, 2017. "Measuring the financial soundness of U.S. firms, 1926–2012," Research in Economics, Elsevier, vol. 71(3), pages 613-635.
    4. Joëts, Marc & Mignon, Valérie & Razafindrabe, Tovonony, 2017. "Does the volatility of commodity prices reflect macroeconomic uncertainty?," Energy Economics, Elsevier, vol. 68(C), pages 313-326.
    5. 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.
    6. Goemans, Pascal & Belke, Ansgar, 2019. "Uncertainty and non-linear macroeconomic effects of fiscal policy in the US: A SEIVAR-based analysis," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203538, Verein für Socialpolitik / German Economic Association.
    7. Damiano Sandri & Fabian Valencia, 2012. "Balance-Sheet Shocks and Recapitalizations," IMF Working Papers 12/68, International Monetary Fund.
    8. Sourafel Girma & Sandra Lancheros & Alejandro Riaño, 2016. "Global Engagement and Returns Volatility," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(6), pages 814-833, December.
    9. Leduc, Sylvain & Liu, Zheng, 2016. "Uncertainty shocks are aggregate demand shocks," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 20-35.
    10. Fabian Valencia, 2013. "Aggregate Uncertainty and the Supply of Credit," IMF Working Papers 13/241, International Monetary Fund.
    11. Johnson, Timothy C. & Lee, Jaehoon, 2014. "On the systematic volatility of unpriced earnings," Journal of Financial Economics, Elsevier, vol. 114(1), pages 84-104.
    12. Ralf Fendel & Nicola Mai & Oliver Mohr, 2019. "The Shape of Eurozone’s Uncertainty: Its Impact and Predictive Value on GDP," WHU Working Paper Series - Economics Group 19-01, WHU - Otto Beisheim School of Management.
    13. 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.

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