HETEROGENEITY AND REDISTRIBUTION IN FINANCIAL CRISES. (1st August 2016)

• Record Type: Journal Article
• Authors: Kobayashi, Keiichiro; Shirai, Daichi
• Is Part Of: Macroeconomic dynamics. Volume 20:Number 6(2016:Sep.)
• Page Start: 1527
• Page End: 1549
• Publication Date: 2016-08-01
• Subjects: Heterogeneity, -- Borrowing Constraint, -- Redistribution of Wealth, -- Labor Wedge; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100514001011
• Languages: English
• ISSNs: 1365-1005

Abstract

Abstract : This paper presents a simple model of an economy with heterogeneous agents to show that the redistribution of wealth among such agents can play a significant role in the propagation mechanism of financial crises. In an economy where firms with heterogeneous productivity operate under borrowing constraints, the redistribution reproduces hump-shaped responses for output and labor and procyclicality in observed productivity. In this model, a financial shock generates a persistent and hump-shaped response, whereas a productivity shock does not. Further, the redistribution of wealth significantly amplifies the persistence and hump shape of these responses following a financial shock. This model suggests that redistribution may thus be a key driving force behind the transmission of financial crises.