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Credit Frictions in the Great Recession

Patrick Kehoe (), Pierlauro Lopez, Virgiliu Midrigan and Elena Pastorino ()

No 617, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Although a credit tightening is commonly recognized as a key determinant of the Great Recession, to date, it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Some studies have suggested that the household-side credit channel is quantitatively the most important one. Many others contend that the firm-side channel played a crucial role. We propose a model in which both channels are present and explicitly formalized. Our analysis indicates that the household-side credit channel is quantitatively more relevant than the firm-side credit channel. We then evaluate the relative benefits of a fixed-sized transfer to households and to firms that improves each group's access to credit. We find that the effects of such a transfer on employment are substantially larger when the transfer targets households rather than firms. Hence, we provide theoretical and quantitative support to the view that the employment decline during the Great Recession would have been less severe if instead of focusing on easing firms' access to credit, the government had expended an equal amount of resources to alleviate households' credit constraints.

Keywords: Credit constraints; Collateral constraints; Great Recession; Financial recession; Government transfers (search for similar items in EconPapers)
JEL-codes: E30 E32 E62 H51 J20 J60 (search for similar items in EconPapers)
Pages: 64
Date: 2020-12-15
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:89161

DOI: 10.21034/sr.617

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