Financial Frictions and the Wealth Distribution

Jesus Fernandez-Villaverde, Samuel Hurtado and Galo Nuño Barrau

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper investigates how, in a heterogeneous agents model with ?nancial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate time-varying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be e?ciently computed, despite its substantial nonlinearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with di?usions. We document, ?rst, the strong nonlinearities created by ?nancial frictions. Second, we report the existence of multiple stochastic steady states with properties that di?er from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse re-sponse functions of the model are highly state-dependent. In particular, we ?nd that the recovery after a negative aggregate shock is more sluggish when the economy is more lever-aged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.

Keywords: Heterogeneous agents; aggregate shocks; continuous-time; machine learning; neural networks; structural estimation; likelihood functions (search for similar items in EconPapers)
JEL-codes: C45 C63 E32 E44 G01 G11 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2019-09-13
New Economics Papers: this item is included in nep-big, nep-dge, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Related works:
Journal Article: Financial Frictions and the Wealth Distribution (2023)
Working Paper: Financial frictions and the wealth distribution (2020)
Working Paper: Financial Frictions and the Wealth Distribution (2020)
Working Paper: Financial Frictions and the Wealth Distribution (2019)
Working Paper: Financial Frictions and the Wealth Distribution (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:19-015

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