Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity

Aubhik Khan and Julia Thomas

Journal of Political Economy, 2013, vol. 121, issue 6, 1055 - 1107

Abstract: We study the cyclical implications of credit market imperfections in a quantitative dynamic, stochastic general equilibrium model wherein firms face persistent shocks to aggregate and individual productivity. In our model economy, optimal capital reallocation is distorted by two frictions: collateralized borrowing and partial investment irreversibility. We find that a negative shock to borrowing conditions can, on its own, generate a large and persistent recession through disruptions to the distribution of capital. This recession, and the subsequent recovery, is distinguished both quantitatively and qualitatively from that driven by an exogenous shock to total factor productivity.

Date: 2013
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Related works:
Working Paper: Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity (2011)
Working Paper: Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity (2010)
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