Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity

Francisco Buera and Benjamin Moll

American Economic Journal: Macroeconomics, 2015, vol. 7, issue 3, 1-42

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. (JEL E22, E23, E32, E43, E44)

JEL-codes: E22 E23 E32 E43 E44 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mac.20130212
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Citations: View citations in EconPapers (138)

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