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Financial Frictions and Fluctuations in Volatility
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Journal Article
Financial Frictions and Fluctuations in Volatility
2019
Overview
The US Great Recession featured a large decline in output and labor, tighter financial conditions, and a large increase in firm growth dispersion. We build a model in which increased volatility at the firm level generates a downturn and worsened credit conditions. The key idea is that hiring inputs is risky because financial frictions limit firms’ ability to insure against shocks. An increase in volatility induces firms to reduce their inputs to reduce such risk. Our model can generate most of the decline in output and labor in the Great Recession and the observed increase in firms’ interest rate spreads.
Publisher
University of Chicago Press,The University of Chicago Press,University of Chicago, acting through its Press
Subject
