Financial Frictions and the Wealth Distribution

73 Pages Posted: 2 Jun 2020

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 Nuno

Banco de España

Multiple version iconThere are 4 versions of this paper

Date Written: June 1, 2020

Abstract

We postulate a nonlinear DSGE model with a financial sector and heterogeneous households. In our model, the interaction between the supply of bonds by the financial sector and the precautionary demand for bonds by households produces significant endogenous aggregate risk. This risk induces an endogenous regime-switching process for output, the risk-free rate, excess returns, debt, and leverage. The regime-switching generates i) multimodal distributions of the variables above; ii) time-varying levels of volatility and skewness for the same variables; and iii) supercycles of borrowing and deleveraging. All of these are important properties of the data. In comparison, the representative household version of the model cannot generate any of these features. Methodologically, we discuss how nonlinear DSGE models with heterogeneous agents can be efficiently computed using machine learning and how they can be estimated with a likelihood function, using inference with diffusions.

Keywords: heterogeneous agents, wealth distribution, financial frictions, continuoustime, machine learning, neural networks, structural estimation, likelihood function

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 (June 1, 2020). Banco de Espana Working Paper No. 2013, Available at SSRN: https://ssrn.com/abstract=3615695 or http://dx.doi.org/10.2139/ssrn.3615695

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Samuel Hurtado

Banco de España ( email )

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Galo Nuno

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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