Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity

63 Pages Posted: 29 Aug 2011

See all articles by Aubhik Khan

Aubhik Khan

Ohio State University (OSU)

Julia K. Thomas

Ohio State University

Date Written: August 2011

Abstract

We study the cyclical implications of credit market imperfections in a calibrated dynamic, stochastic general equilibrium model wherein firms face persistent shocks to aggregate and individual productivity. In our model economy, optimal capital reallocation is distorted by two frictions: collateralized borrowing and partial capital irreversibility yielding (S,s) firm-level investment policies.In the presence of persistent heterogeneity in capital, debt and total factor productivity, the effects of a financial shock are amplified and propagated through large and long-lived disruptions to the distribution of capital that, in turn, imply large and persistent reductions in aggregate total factor productivity. We find that an unanticipated tightening in borrowing conditions can, on its own, generate a large recession far more persistent than the financial shock itself. This recession, and the subsequent recovery, is distinguished both quantitatively and qualitatively from that driven by exogenous shocks to total factor productivity.

Suggested Citation

Khan, Aubhik and Thomas, Julia Kathryn, Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity (August 2011). NBER Working Paper No. w17311, Available at SSRN: https://ssrn.com/abstract=1918641

Aubhik Khan (Contact Author)

Ohio State University (OSU) ( email )

2120 Fyffe Road
Columbus, OH OH 43210
United States

Julia Kathryn Thomas

Ohio State University

410 Arps Hall
1945 N. High St.
Columbus, OH 43210
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
13
Abstract Views
1,582
PlumX Metrics