Financial Frictions and the Wealth Distribution

Abstract

This paper investigates how, in a heterogeneous agents model with financial frictions, idiosyncratic individual shocks interact with exogenous aggregate shocks to generate timevarying levels of leverage and endogenous aggregate risk. To do so, we show how such a model can be efficiently computed, despite its substantial nonlinearities, 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 nonlinearities 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 leveraged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.

Why Cognitive Test Scores of Spanish Adults are so Low? The Role of Schooling and Socioeconomic Background

“…is analogous to Table5in the main text, and shows the results of the Oaxaca-Blinder decomposition for the literacy test score by gender, age and nationality.TableA4reports descriptive statistics about the differences in education, socio-demographic characteristics and parental education between Spain and the group of other EU countries by gender. TablesA5 and A6show the same descriptive statistics by age and nationality, respectively.Figures A3, A4 and A5 are analogous to, respectively, Figure3, 4 and 5 and show the results of the quantile decomposition by Chernozhukov et al(2013) for the literacy test score. Oaxaca-Blinder alternative decomposition…”

“…This is relevant because the Oaxaca-Blinder decomposition only shows how compositional effects account for differences in test scores at the mean, whereas these might vary throughout the distribution of test scores. Our first approach follows the work of Chernozhukov et al (2013). Intuitively, this allows to decompose the difference between the -th quantile of the unconditional distribution of the cognitive skill of the EU countries and Spain into an effect due to differences in characteristics and an effect due to differences in coefficients:…”

“…In order to better understand how educational and socio-demographic differences contribute to the cognitive skill gaps across the distribution, we also present another decomposition exercise based on the methodology by Firpo et al (2009). 10 Whereas Chernozhukov et al (2013) allows to 10 The methodology of Firpo et al (2009) is based on the estimation of Recentered Influence Functions (RIF) regressions of the unconditional quantile on the explanatory variables.…”

Microeconomic Heterogeneity and Macroeconomic Shocks

“…In recent years, several new computational methods have been proposed that have widened the set of models that can be accurately solved. These include mixtures of projection and perturbation (Reiter, 2009), mixtures of finite difference methods and perturbation (Ahn et al, 2017), adaptive sparse grids (Brumm and Scheidegger, 2017), polynomial chaos expansions (Pröhl, 2017), machine learning (Duarte, 2018;Fernández-Villaverde et al, 2018) and linearization with impulse-response functions (Boppart et al, 2017). Which of these, or other, methods will ultimately prevail is an open question.…”

Emu Deepening and Sovereign Debt Spreads: Using Political Space to Achieve Policy Space

“…The hypothesis is that noteworthy decisions reduce the sovereign spread of those countries regarded as riskier with respect to the risk-free equivalent 1 Introduction Political events, public speeches and the ability of policy makers to reach agreements can influence sovereign spreads. This is particularly relevant for the European Monetary Union (EMU), as market perceptions of risk, sometimes beyond what fundamentals would tell (Aizenman et al (2013), De Grauwe (2011); De Grauwe and Ji (2012); Saka et al (2015)), are entangled with redenomination risk, the possibility that the euro area would break up and bonds would no longer be denominated in the common currency (Gros (2018)). These considerations were quite evident during the debate to set up a European Recovery Fund in 2020 to combat the consequences of the COVID-19 crisis, when news about its size and characteristics were able to drive down market perceptions of credit risk against a background of rising public debt ratios and a profound economic downturn.…”