Aggregate Implications of a Credit Crunch
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.
We thank Manuel Amador, Marios Angeletos, Roland Bénabou, Markus Brunnermeier, Mike Golosov, Urban Jermann, Patrick Kehoe, Guido Lorenzoni, Stephen Redding, Richard Rogerson, Esteban Rossi-Hansberg and seminar participants at Princeton, the Federal Reserve Board of Governors, Rutgers, Minneapolis Fed, Wharton, Georgetown, NYU, Boston University, MIT, Ohio State, ASU, Université de Montréal and 2011 NBER Summer Institute and Minnesota Workshop in Macroeconomic Theory for useful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.