Entrepreneurial Risk, Collateral Constraints and Macroeconomic Fluctuations

31 Pages Posted: 8 Aug 2019

See all articles by Johannes Brumm

Johannes Brumm

Karlsruhe Institute of Technology

Date Written: August 5, 2019

Abstract

We present a calibrated general equilibrium model in which collateral constraints substantially amplify and propagate aggregate shocks through their impact on asset prices and capital allocation. Compared to previous studies, this result is more robust and comes with more realistic interest rate dynamics. Agents productivities as workers and entrepreneurs evolve stochastically, creating a mismatch between wealth and skills. Negative shocks to aggregate productivity cause the capital allocation to deteriorate as constrained agents' wealth falls and their number rises. We capture these non-linear dynamics of the wealth distribution and show that amplification is sizable and asymmetric, making recessions sharper than booms.

Keywords: Amplification, Collateral Constraints, Entrepreneurship, Financial Frictions, Heterogeneity

JEL Classification: C68, D92, E32

Suggested Citation

Brumm, Johannes, Entrepreneurial Risk, Collateral Constraints and Macroeconomic Fluctuations (August 5, 2019). Available at SSRN: https://ssrn.com/abstract=3432620 or http://dx.doi.org/10.2139/ssrn.3432620

Johannes Brumm (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstra├če 12
Karlsruhe, Baden W├╝rttemberg 76131
Germany

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