Aggregate implications of a credit crunch: The importance of heterogeneity

Francisco J. Buera, Benjamin Moll

Research output: Contribution to journalArticle

31 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1-42
Number of pages42
JournalAmerican Economic Journal: Macroeconomics
Volume7
Issue number3
DOIs
StatePublished - Jan 1 2015

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

Fingerprint Dive into the research topics of 'Aggregate implications of a credit crunch: The importance of heterogeneity'. Together they form a unique fingerprint.

  • Cite this