How do financial frictions affect the response of an economy to aggregate shocks? In this paper, we address this question, focusing on liquidity constraints and uninsurable idiosyncratic risk. We consider a search model where agents use liquid assets to smooth individual income shocks. We show that...

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Bibliographic Details

Main Authors:	Guerrieri, Veronica (Author), Lorenzoni, Guido (Author)
Format:	Book
Language:	English
Published:	Cambridge, Mass. National Bureau of Economic Research 2007
Series:	Working paper series / National Bureau of Economic Research 13204
Online Access:	Volltext
Summary:	How do financial frictions affect the response of an economy to aggregate shocks? In this paper, we address this question, focusing on liquidity constraints and uninsurable idiosyncratic risk. We consider a search model where agents use liquid assets to smooth individual income shocks. We show that the response of this economy to aggregate shocks depends on the rate of return on liquid assets. In economies where liquid assets pay a low return, agents hold smaller liquid reserves and the response of the economy tends to be larger. In this case, agents expect to be liquidity constrained and, due to a self-insurance motive, their consumption decisions are more sensitive to changes in expected income. On the other hand, in economies where liquid assets pay a large return, agents hold larger reserves and their consumption decisions are more insulated from income uncertainty. Therefore, aggregate shocks tend to have larger effects if liquid assets pay a lower rate of return.
Item Description:	Literaturverz. S. 44 - 46
Physical Description:	46 S. graph. Darst. 22 cm