Financial Markets and Fluctuations in Uncertainty

Yan Bai, Patrick Kehoe and Cristina Arellano

No 896, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Researchers have documented that in the recent financial crisis the large decline in economic activity and credit has been accompanied by a large increase in the dispersion of growth rates across firms. We build a quantitative general equilibrium model in which financial frictions interact with increases in uncertainty at the firm level to generate a contraction in economic activity and a large increase in the dispersion of growth rates across firms. We find that our model can generate about 67% of the decline in output of the Great Recession of 2007. A promising feature of our model is that it generates large labor wedges, a feature of the recent data on business cycles.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:896

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