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Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity

Author(s): Buera, Francisco J; Moll, Benjamin

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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.
Publication Date: Jul-2015
Citation: Buera, Francisco J, Moll, Benjamin. (2015). Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity. American Economic Journal: Macroeconomics, 7 (3), 1 - 42. doi:10.1257/mac.20130212
DOI: doi:10.1257/mac.20130212
ISSN: 1945-7707
EISSN: 1945-7715
Pages: 1 - 42
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Journal: Macroeconomics
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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