Entrepreneurial Risk, Collateral Constraints and Macroeconomic Fluctuations
31 Pages Posted: 8 Aug 2019
Date Written: August 5, 2019
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: Suggested Citation