Financial Frictions and the Wealth Distribution

Jesús Fernández‐Villaverde, Samuel Hurtado and Galo Nuño Barrau

Econometrica, 2023, vol. 91, issue 3, 869-901

Abstract: We postulate a continuous‐time heterogeneous agent model with a financial sector and households to study the nonlinear linkages between aggregate and financial variables. In our model, the interaction between the supply of bonds by the financial sector and the precautionary demand for bonds by households produces significant endogenous aggregate risk. This risk makes the economy transition between a high‐leverage region and a low‐leverage region, which, in turn, creates state dependence in impulse responses: the same shock starting from the high‐leverage region gets propagated and amplified more than when the shock arrives when leverage is low. State dependence in impulse responses generates a time‐varying aggregate precautionary savings motive that, by moving the risk‐free rate, justifies the leverage level of the financial sector in each region. Finally, we illustrate the usefulness of neutral networks to solve for the nonlinear perceived law of motion of the model, and the importance of household heterogeneity in driving its quantitative properties.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://doi.org/10.3982/ECTA18180

Related works:
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)
Working Paper: Financial Frictions and the Wealth Distribution (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:91:y:2023:i:3:p:869-901

Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues

Access Statistics for this article

Econometrica is currently edited by Guido W. Imbens

More articles in Econometrica from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().