Financial Frictions and the Wealth Distribution

Fernández-Villaverde, Jesús, Samuel Hurtado and Nuño, Galo
Authors registered in the RePEc Author Service: Jesus Fernandez-Villaverde

No 14002, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates how, in a heterogeneous agents model with financial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate time-varying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial nonlinearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with diffusions. We document, first, the strong nonlinearities created by financial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we find that the recovery after a negative aggregate shock is more sluggish when the economy is more leveraged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.

Keywords: Heterogeneous agents; Aggregate shocks; Continuous-time; Machine learning; Structural estimation (search for similar items in EconPapers)
JEL-codes: C45 C63 E32 E44 G01 G11 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-big, nep-dge, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
https://cepr.org/publications/DP14002 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Financial Frictions and the Wealth Distribution (2023)
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)
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:cpr:ceprdp:14002

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14002

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().