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HETEROGENEITY AND REDISTRIBUTION IN FINANCIAL CRISES

Keiichiro Kobayashi and Daichi Shirai

Macroeconomic Dynamics, 2016, vol. 20, issue 6, 1527-1549

Abstract: This paper presents a simple model of an economy with heterogeneous agents to show that the redistribution of wealth among such agents can play a significant role in the propagation mechanism of financial crises. In an economy where firms with heterogeneous productivity operate under borrowing constraints, the redistribution reproduces hump-shaped responses for output and labor and procyclicality in observed productivity. In this model, a financial shock generates a persistent and hump-shaped response, whereas a productivity shock does not. Further, the redistribution of wealth significantly amplifies the persistence and hump shape of these responses following a financial shock. This model suggests that redistribution may thus be a key driving force behind the transmission of financial crises.

Date: 2016
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Working Paper: Heterogeneity and redistribution in financial crises (2014) Downloads
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