Financial Frictions, Asset Prices, and the Great Recession

Zhen Huo
Authors registered in the RePEc Author Service: José-Víctor Ríos-Rull

No 11544, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study financial shocks to households’ ability to borrow in an economy that quantitatively replicates U.S. earnings, financial, and housing wealth distributions and the main macro aggregates. Such shocks generate large recessions via the negative wealth effect associated with the large drop in house prices triggered by the reduced access to credit of a large number of households. The model incorporates additional margins that are crucial for a large recession to occur: that it is difficult to reallocate production from consumption to investment or net exports, and that the reductions in consumption contribute to reductions in measured TFP.

Keywords: Balance sheet recession; Asset price; Goods market frictions; Labor market frictions (search for similar items in EconPapers)
JEL-codes: E20 E32 E44 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Working Paper: Financial Frictions, Asset Prices, and the Great Recession (2016)
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