Financial Frictions and the Wealth Distribution

70 Pages Posted: 18 Sep 2019

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Samuel Hurtado

Banco de España

Galo Nuño

Banco de España

Multiple version iconThere are 3 versions of this paper

Date Written: September 13, 2019

Abstract

This paper investigates how, in a heterogeneous agents model with financial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate time-varying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial non-linearities, using tools from machine learning. We also illustrate how the model can be structurally estimated with a likelihood function, using tools from inference with diffusions. We document, first, the strong non-linearities created by financial frictions. Second, we report the existence of multiple stochastic steady states with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse response functions of the model are highly state-dependent. In particular, we find that the recovery after a negative aggregate shock is more sluggish when the economy is more lever-aged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.

Keywords: heterogeneous agents; aggregate shocks; continuous-time; machine learning; neural networks; structural estimation; likelihood functions

JEL Classification: C45, C63, E32, E44, G01, G11

Suggested Citation

Fernández-Villaverde, Jesús and Hurtado, Samuel and Nuno, Galo, Financial Frictions and the Wealth Distribution (September 13, 2019). PIER Working Paper No. 19-015, September 2019. Available at SSRN: https://ssrn.com/abstract=3455286 or http://dx.doi.org/10.2139/ssrn.3455286

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
160 McNeil Building
Philadelphia, PA 19104
United States
215-898-1504 (Phone)
215-573-2057 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Samuel Hurtado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Galo Nuno

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
16
Abstract Views
159
PlumX Metrics