Financial Frictions: Macro vs Micro Volatility

Renato Faccini, Seungcheol Lee, Ralph Luetticke, Morten Ravn and Tobias Renkin

No 15133, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Consumer credit spreads significantly impact consumption and asset dynamics, affecting indebted households' spending behavior and the income sensitivity of consumption. Analyzing Danish data, we find that elevated credit spreads reduce consumption of indebted households. Our results suggest that the marginal propensity to consume (MPC) is countercyclical, with credit spreads playing a crucial role. We develop a HANK model, incorporating bank financing for both firms and households. Agency frictions generate a countercyclical credit spread, which induces heterogeneous incidence of aggregate shocks consistent with the data. Banking regulation, while stabilizing at the aggregate level, may induce volatility at the household level.

Keywords: Business cycles; Financial frictions; Incomplete markets; Macroprudential policy; Monetary policy (search for similar items in EconPapers)
JEL-codes: C11 D31 E32 E63 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-dge, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Financial frictions: micro vs macro volatility (2021)
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