Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity

Aubhik Khan and Julia Thomas

No 17311, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the cyclical implications of credit market imperfections in a calibrated 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 capital irreversibility yielding (S,s) firm-level investment policies. In the presence of persistent heterogeneity in capital, debt and total factor productivity, the effects of a financial shock are amplified and propagated through large and long-lived disruptions to the distribution of capital that, in turn, imply large and persistent reductions in aggregate total factor productivity. We find that an unanticipated tightening in borrowing conditions can, on its own, generate a large recession far more persistent than the financial shock itself. This recession, and the subsequent recovery, is distinguished both quantitatively and qualitatively from that driven by exogenous shocks to total factor productivity.

JEL-codes: E22 E32 E44 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Note: EFG PR
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Citations: View citations in EconPapers (37)

Published as Aubhik Khan & Julia K. Thomas, 2013. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1055 - 1107.

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Working Paper: Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity (2010)
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