Credit Constraints and Self-Fulfilling Business Cycles

2014 ◽  
Vol 6 (1) ◽  
pp. 32-69 ◽  
Author(s):  
Zheng Liu ◽  
Pengfei Wang
Keyword(s):  
Business Cycles ◽  
Credit Constraints ◽  
Heterogeneous Firms ◽  
Increasing Returns ◽  
Contract Enforcement ◽  
Aggregate Productivity ◽  
Representative Agent ◽  
Equity Value ◽  
Aggregate Dynamics

We argue that credit constraints not only amplify fundamental shocks, they can also lead to self-fulfilling business cycles. We study a model with heterogeneous firms, in which imperfect contract enforcement implies that productive firms face binding credit constraints, with the borrowing capacity limited by expected equity value. A drop in equity value tightens credit constraints and reallocates resources from productive to unproductive firms. Such reallocation reduces aggregate productivity, further depresses equity value, generating a financial multiplier. Aggregate dynamics are isomorphic to those in a representative-agent economy with increasing returns. For sufficiently tight credit constraints, the model generates self-fulfilling business cycles. (JEL E13, E32, E44)

scholarly journals Efficient Firm Dynamics in a Frictional Labor Market

2015 ◽  
Vol 105 (10) ◽  
pp. 3030-3060 ◽  
Author(s):  
Leo Kaas ◽  
Philipp Kircher
Keyword(s):  
Labor Market ◽  
Heterogeneous Firms ◽  
Firm Dynamics ◽  
Market Model ◽  
Job Flows ◽  
Bargaining Models ◽  
The Business Cycle ◽  
Market Variables ◽  
Aggregate Dynamics

We develop and analyze a labor market model in which heterogeneous firms operate under decreasing returns and compete for labor by posting long-term contracts. Firms achieve faster growth by offering higher lifetime wages, which allows them to fill vacancies with higher probability, consistent with recent empirical findings. The model also captures several other regularities about firm size, job flows, and pay, and generates sluggish aggregate dynamics of labor market variables. In contrast to existing bargaining models with large firms, efficiency obtains and the model allows a tractable characterization over the business cycle. (JEL E24, J64, L11)

Capital Reallocation

2018 ◽  
Vol 10 (1) ◽  
pp. 361-386 ◽  
Author(s):  
Andrea L. Eisfeldt ◽  
Yu Shi
Keyword(s):  
United States ◽  
Business Cycles ◽  
Financial Frictions ◽  
The United States ◽  
Future Research ◽  
Aggregate Productivity ◽  
Stylized Facts ◽  
Resource Misallocation ◽  
Capital Reallocation

Capital reallocation is procyclical, despite measured productive reallocative opportunities being acyclical or even countercyclical. This article reviews the advances in the literature studying the causes and consequences of capital reallocation (or lack thereof). We provide a comprehensive set of stylized facts about capital reallocation for the United States and an illustrative model of capital reallocation in equilibrium. We relate capital reallocation to the broader literatures on business cycles with financial frictions and on resource misallocation and aggregate productivity. Throughout, we provide directions for future research.

scholarly journals Plant-Level Irreversible Investment and Equilibrium Business Cycles

2002 ◽  
Vol 92 (1) ◽  
pp. 181-197 ◽  
Author(s):  
Marcelo L Veracierto
Keyword(s):  
Business Cycles ◽  
Business Cycle ◽  
Real Business Cycle ◽  
Aggregate Fluctuations ◽  
Cycle Model ◽  
Irreversible Investment ◽  
Business Cycle Model ◽  
Plant Level ◽  
Aggregate Dynamics ◽  
Real Business Cycle Model

This paper evaluates the importance of microeconomic irreversibilities for aggregate dynamics using a real-business-cycle (RBC) model characterized by investment irreversibilities at the establishment level. The main finding is that investment irreversibilities do not play a significant role in an otherwise standard real-business-cycle model: Even though investment irreversibilities are crucial for establishment-level dynamics, aggregate fluctuations are basically the same under fully flexible or completely irreversible investment.

scholarly journals Informality and Aggregate Productivity

2019 ◽  
Vol 2019 (257) ◽  
Author(s):  
Jorge Alvarez ◽  
Cian Ruane
Keyword(s):  
Heterogeneous Firms ◽  
Informal Employment ◽  
Aggregate Productivity ◽  
Policy Reforms ◽  
Firm Level ◽  
Labor Regulations ◽  
Economic Census

We assess the aggregate productivity impact of distortions arising from labor regulations in Mexico and how they interact with informality. Using employment surveys and a firm-level economic census, we document a number of novel features about informal firms in Mexico. We then construct and estimate a model of heterogeneous firms and endogenous informality to study the micro and macro impacts from various policy reforms. Some reforms may have large impacts on informal employment but small impacts on aggregate productivity.

scholarly journals A Theory of Demand Shocks

2009 ◽  
Vol 99 (5) ◽  
pp. 2050-2084 ◽  
Author(s):  
Guido Lorenzoni
Keyword(s):  
Business Cycles ◽  
Aggregate Demand ◽  
Aggregate Productivity ◽  
Productivity Shocks ◽  
Demand Shocks ◽  
The Public ◽  
Long Run ◽  
Short Run ◽  
Public Signal ◽  
Heterogeneous Productivity

This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives rise to “noise shocks,” which have the features of aggregate demand shocks: they increase output, employment, and inflation in the short run and have no effects in the long run. Numerical examples suggest that the model can generate sizable amounts of noise-driven volatility. (JEL D83, D84, E21, E23, E32)

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