Aggregate Implications of a Credit Crunch

No 17775, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
Note: EFG
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Citations: View citations in EconPapers (54)

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