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Shocks, Frictions, and Inequality in US Business Cycles

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  • Christian Bayer

    (Universitaet Bonn)

  • Ralph Luetticke

    (University College London)

Abstract

The liquidity of the US housing market undergoes large swings that lead the business cycle. After an increase in the time to sell a house, output falls while households increase their liquid asset holdings and simultaneously lower residential investment. A model of incomplete markets and nominal rigidities can rationalize the observed behavior. When houses become less liquid assets, households maintain the capacity for consumption smoothing by demanding a larger portfolio share of liquid (paper) assets instead of houses. This leads to a demand-driven recession. The recessionary effects get stronger if the banking sector produces liquid assets from mortgaging houses.

Suggested Citation

  • Christian Bayer & Ralph Luetticke, 2019. "Shocks, Frictions, and Inequality in US Business Cycles," 2019 Meeting Papers 256, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:256
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    Cited by:

    1. Papp, Tamás K. & Reiter, Michael, 2020. "Estimating linearized heterogeneous agent models using panel data," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    2. Cantore, Cristiano & Freund, Lukas B., 2021. "Workers, capitalists, and the government: fiscal policy and income (re)distribution," Journal of Monetary Economics, Elsevier, vol. 119(C), pages 58-74.
    3. Adrien Auclert & Ludwig Straub & Matthew Rognlie, 2019. "Micro Jumps, Macro Humps: monetary policy and business cycles in an estimated HANK model," 2019 Meeting Papers 1449, Society for Economic Dynamics.
    4. Bayer, Christian & Born, Benjamin & Luetticke, Ralph, 2020. "The Liquidity Channel of Fiscal Policy," CEPR Discussion Papers 14883, C.E.P.R. Discussion Papers.
    5. Böhl, Gregor & Strobel, Felix, 2020. "US business cycle dynamics at the zero lower bound," Discussion Papers 65/2020, Deutsche Bundesbank.
    6. Gregor Boehl & Felix Strobel, 2020. "US Business Cycle Dynamics at the Zero Lower Bound," CRC TR 224 Discussion Paper Series crctr224_2020_192, University of Bonn and University of Mannheim, Germany.
    7. Alice Albonico & Guido Ascari & Qazi Haque, 2020. "The (ir)relevance of rule-of-thumb consumers for US business cycle fluctuations," CAMA Working Papers 2020-102, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Böhl, Gregor & Strobel, Felix, 2020. "US business cycle dynamics at the zero lower bound," IMFS Working Paper Series 143, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    9. Aursland, Thor Andreas & Steen, Frode, 2021. "Unemployment shocks, cyclical prices and shopping behavior," Discussion Paper Series in Economics 3/2021, Norwegian School of Economics, Department of Economics.

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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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