Introduction Baseline Model Housing Model Appendix Balance Sheet Recessions Zhen Huo and Jos´ e-V´ ıctor R´ ıos-Rull University of Minnesota, Federal Reserve Bank of Minneapolis, CAERP , CEPR, NBER Conference on Money, Credit, and Financial Frictions , Huo & R´ ıos-Rull Balance Sheet Recessions 1 / 34
Introduction Baseline Model Housing Model Appendix Can households’ financial distress generate a recession? In Standard Models it is Difficult The economy has a lot of wealth. Only the poor would be really affected: They want to work harder. An expansion. This project We build a model with goods market frictions, where financial distress 1 leads to a recession. Crucially, the attempt to save reduces productivity due to real 2 frictions. We provide a theory of price dispersion during the onset of the 3 recession. , Huo & R´ ıos-Rull Balance Sheet Recessions 2 / 34
Introduction Baseline Model Housing Model Appendix The logic When hit by adverse financial shocks, agents tend to increase saving by cutting consumption expenditures. Goods market frictions translate lower consumption expenditures into output loss, despite the decline of prices. There is a realignment of consumption patterns: large drops of consumption for the poorest but modest increase of consumption for the richest. When we explicitly add housing that can be used as collateral, increased financial frictions greatly amplifies the magnitude of the recession. , Huo & R´ ıos-Rull Balance Sheet Recessions 3 / 34
Introduction Baseline Model Housing Model Appendix The ingredients Heterogeneous agents model (How else can there be financial frictions?) There are very rich, rich, poor, very poor, and borrowers; lucky and unlucky: a modern economy’s earnings and wealth distribution. Price dispersion: the rich are not into hassles (they pay higher prices). Storage economy: fixed return to savings. In addition to goods (that can be saved) there are services (that cannot be saved). Goods (services, really) market frictions a la Bai, Rios-Rull and Storesletten (2011) with a touch of Lagos and Wright (2005) , Huo & R´ ıos-Rull Balance Sheet Recessions 4 / 34
Introduction Baseline Model Housing Model Appendix The contribution We show that Financial distress can lead to a recession even when agents own a lot 1 of wealth. Goods market frictions are crucial in generating the recession. 2 No nominal rigidities are required. 3 Price dispersion is counter-cyclical. 4 With housing, the effects of financial distress are more pronounced. 5 , Huo & R´ ıos-Rull Balance Sheet Recessions 5 / 34
Introduction Baseline Model Housing Model Appendix The Model , Huo & R´ ıos-Rull Balance Sheet Recessions 6 / 34
Introduction Baseline Model Housing Model Appendix Environment Many agents that live forever and have idyosincratic shocks to endowments. Two goods per period: Numeraire goods Used for consumption and storage. As if traded in a centralized market. Services Used only for consumption. Traded in decentralized markets and subject to search frictions. , Huo & R´ ıos-Rull Balance Sheet Recessions 7 / 34
Introduction Baseline Model Housing Model Appendix Preference Agents’ period utility function is u ( c, s, d ) . Agents value numeraire goods consumption c and services s . To obtain services, agents have to exert search efforts d s = d Ψ b ( q ) . Ψ b ( q ) : probability of a shopper finding services. , Huo & R´ ıos-Rull Balance Sheet Recessions 8 / 34
Introduction Baseline Model Housing Model Appendix Competitive search in services markets Markets are indexed by price p and market tightness q = T D . In market ( p, q ) Active markets, sellers have guaranteed revenue p Ψ s ( q ) ≥ ζ equilibrium determined object ζ . Buyers face a trade-off between p and Ψ b ( q ) when choosing markets: Rich agents go to high p, high q markets. Poor agents go to low p, low q markets. , Huo & R´ ıos-Rull Balance Sheet Recessions 9 / 34
Introduction Baseline Model Housing Model Appendix Endowments An agent receives y s units of active locations capable of producing services. When a location is found by a buyer, 1 unit of services is produced. When a location is not found by a buyer, nothing is produced. An agent receives y c units of numeraire goods that can be consumed, sold, or stored/loaned. y = { y c , y s } follows a Markov process Π y,y ′ . Households’ asset position is a . There is an ad-hoc borrowing limit a . , Huo & R´ ıos-Rull Balance Sheet Recessions 10 / 34
Introduction Baseline Model Housing Model Appendix Agents’ recursive problem � Π y,y ′ V ( y ′ , a ′ ) , V ( y, a ) = max u ( c, s, d ) + β a ′ ,c,s, y ′ d,p,q subject to p s + c + a ′ ≥ (1 + r ) a + ζ y s + y c , s = d Ψ b ( q ) , ζ ≤ p Ψ s ( q ) , a ′ ≥ a. Note that agents choose consumption and savings as well as which market ( p, q ) to go to. , Huo & R´ ıos-Rull Balance Sheet Recessions 11 / 34
Introduction Baseline Model Housing Model Appendix Macroeconomic Aggregates (what NIPA measures)? � Aggregate active locations: T s = y s dx ( y, a ) � Aggregate numeraire goods endowment: Y c = y c dx ( y, a ) � Aggregate savings: A = a dx ( y, a ) Aggregate output (GDP): � T s p i Ψ f ( q i ) di Y = rA + Y c + 0 ≈ rA + Y c + p M ( D, T s ) Total output is increasing in aggregate search effort D . , Huo & R´ ıos-Rull Balance Sheet Recessions 12 / 34
Introduction Baseline Model Housing Model Appendix Labor and Productivity We impute labor to locations and then we can separate output changes due to labor and to productivity. Labor To maintain a location, ǫ units of labor is required. When matched with a buyer , additional 1 − ǫ units of labor is required to produce services. Aggregate labor is � T s Ψ f ( q i ) di N = ǫ T s + (1 − ǫ ) 0 Productivity A = Y N , Huo & R´ ıos-Rull Balance Sheet Recessions 13 / 34
Introduction Baseline Model Housing Model Appendix Analysis We build an empirically informed quantitative economy. We report its properties in the steady state. and its properties in the aftermath of a financial shock. , Huo & R´ ıos-Rull Balance Sheet Recessions 14 / 34
Introduction Baseline Model Housing Model Appendix Functional forms: So consumption and productivity move together Preferences � � 1 − σ d 1+ γ 1 u ( c, s, d ) = c A − ξ d 1 − σ 1 + γ � � η η − 1 η − 1 η − 1 c A = (1 − ω ) c + ωs η η Matching DT M ( D, T ) = 1 ( D µ + T µ ) µ Ψ d ( q ) = (1 + q − µ ) − 1 µ Ψ f ( q ) = (1 + q µ ) − 1 µ , Huo & R´ ıos-Rull Balance Sheet Recessions 15 / 34
Introduction Baseline Model Housing Model Appendix Wealth Lorenz curve Parameter Four types of agents: poor, normal, rich and super rich. 1 Model Data 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 , Huo & R´ ıos-Rull Balance Sheet Recessions 16 / 34
Introduction Baseline Model Housing Model Appendix Steady state properties Rich agents go to expensive markets with short waiting lines. Poor agents go to cheap markets with long waiting lines. Price Prob of finding services 0.89 0.54 0.52 0.88 0.5 0.87 0.48 0.46 0.86 0.44 0.85 0.42 0.4 0.84 0.38 0.83 0.36 0.82 0.34 0 2 4 6 8 10 12 14 16 0 2 4 6 8 10 12 14 16 Wealth Wealth , Huo & R´ ıos-Rull Balance Sheet Recessions 17 / 34
Introduction Baseline Model Housing Model Appendix A Shock to the Borrowing Constraint The borrowing constraint is tightened unexpectedly but gradually. Agents cannot borrow any more in the new steady state. , Huo & R´ ıos-Rull Balance Sheet Recessions 18 / 34
Introduction Baseline Model Housing Model Appendix Transition The borrowing constraint changes gradually. 0 −0.02 −0.04 −0.06 −0.08 −0.1 −0.12 −0.14 −0.16 −0.18 1 2 3 4 5 6 7 8 9 10 Borrowing limit, a Otherwise, some agents may have to default on their debts. , Huo & R´ ıos-Rull Balance Sheet Recessions 19 / 34
Introduction Baseline Model Housing Model Appendix The Economy After the Shock We now look at the evolution of aggregate variables after the financial shock. It requires to solve for the equilibrium values of ζ t along the transition. , Huo & R´ ıos-Rull Balance Sheet Recessions 20 / 34
Introduction Baseline Model Housing Model Appendix Transition: aggregate 0.1 0.1 0 0 −0.1 −0.1 −0.2 −0.3 −0.2 −0.4 −0.3 −0.5 −0.6 −0.4 −0.7 −0.5 −0.8 −0.6 −0.9 0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40 Output Services 0.05 0.1 0.05 0 0 −0.05 −0.05 −0.1 −0.1 −0.15 −0.15 −0.2 −0.2 −0.25 −0.25 −0.3 −0.3 0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 40 Labor Productivity , Huo & R´ ıos-Rull Balance Sheet Recessions 21 / 34
Recommend
More recommend
