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Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity
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Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity
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Journal Article
Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity
2015
Overview
We take an off-the-shelf model with financial frictions and heterogeneity, and study the mapping from a credit crunch, modeled as a shock to collateral constraints, to simple aggregate wedges. We study three variants of this model that only differ in the form of underlying heterogeneity. We find that in all three model variants a credit crunch shows up as a different wedge: efficiency, investment, and labor wedges. Furthermore, all three model variants have an undistorted Euler equation for the aggregate of firm owners. These results highlight the limitations of using representative agent models to identify sources of business cycle fluctuations.
Publisher
American Economic Association
Subject
