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Financial Frictions and the Wealth Distribution

Jesus Fernandez-Villaverde, Samuel Hurtado and Galo Nuño Barrau

No 26302, NBER Working Papers from National Bureau of Economic Research, Inc

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.

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-dge, nep-mac and nep-ore
Note: EFG
References: Add references at CitEc
Citations: View citations in EconPapers (32)

Published as Jesús Fernández‐Villaverde & Samuel Hurtado & Galo Nuño, 2023. "Financial Frictions and the Wealth Distribution," Econometrica, Econometric Society, vol. 91(3), pages 869-901, May.

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Related works:
Journal Article: Financial Frictions and the Wealth Distribution (2023) Downloads
Working Paper: Financial frictions and the wealth distribution (2020) Downloads
Working Paper: Financial Frictions and the Wealth Distribution (2020) Downloads
Working Paper: Financial Frictions and the Wealth Distribution (2019) Downloads
Working Paper: Financial Frictions and the Wealth Distribution (2019) Downloads
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