Professional Documents
Culture Documents
Vincenzo Quadrini
(presented by Chi-Wa Yuen)
Introduction
Role of nancial frictions in business cycles (and crises) as
impulse source of uctuations?
propagation mechanism amplication of shocks?
Financial cycles empirical regularity about nancial variables (both prices and
quantities) and their relations with other macro variables over the business cycle?
limited enforcement;
heterogeneity in preferences/endowments/technologies between two groups of
agents that would end up being suppliers and demanders of loanable funds in
terms of preferences.
= 0 vs.
y0e
= A0K
w
y1w = A1G k0;1
A1 > 1 ;
j
1
e
h0
e ; with G0 (k )
vs. y1e = A1k0;1
k0;1 = j i0 + (1
) k 1;0; j = w; e; with
kw1;0 = 0 < K = ke 1;0; and = 0:
= 0;
1 for k 1 0 and
( );
2.1
The worker
Workers problem
max
n
w w w w
hw
0 ;c0 ;c1 ;k0;1 ;b0;1
20
6B
w
o E0 4@c0
1
2
hw
0
C
A+
cw
15
8
w + q k w + p bw
w + B;
>
c
w
h
>
0
0
0
0
0;1
0;1
0
<
w + bw ;
s:t: cw
A
G
k
1
1
0;1
0;1
>
>
: cw
cmin ' 0; t = 0; 1;
t
Utility-maximizing conditions
w
0
wq
0 0
w
0
=1= w
1
w;
1
(F OC (cw
t ))
ww ;
hw
=
0
0 0
(F OC hw
0 )
w A G0 k w ;
1 1
0;1
w )
(F OC k0;1
wp
0 0
w ( cw
t
t
w;
1
cmin) = 0; t = 0; 1:
(F OC bw
0;1 )
(CSC (cw
t ))
cw
1 > cmin
CSC (cw
1)
=)
w
1
w
hw
0 = (1 + 0 ) w0 ;
0
w
(1 + w
0 ) q0 = A1 G k0;1 ;
(1 + w
0 ) p0 = ;
w (cw
0
0
cmin) = 0:
= 0
F OC (cw
1)
=)
w
1
= 1: The
(F OC hw
0 )
w )
(F OC k0;1
(F OC bw
0;1 )
(CSC cw
0 )
2.2
The entrepreneur
Entrepreneurs problem
e
max
n
o E0 (c0 +
e ;be
he0 ;ce0 ;ce1 ;k0;1
0;1
ce1)
8 e
e + p be
c0 + q0k0;1
N0 + ei N;
>
0
>
0;1
>
>
>
1
>
e
e
e
>
N
+
q
K
B;
where
A
K
h
>
0
0
0 h
>
0
0
0
>
< e
e
1)
;
where
i
arg
max
q
E
(
q
i
(
)
i
0
0
s:t:
0
0
0
i
>
e
e
e
>
>
c1 A1k0;1 + b0;1;
>
>
>
e
>
>
c
cmin ' 0; t = 0; 1;
>
>
: et
i0 0;
( )g :
w0he0;
ie0
Utility-maximizing conditions
e
0
e
0
= 1 = e1
w0 = (1
e [q E (
0 0
ep
0 0
(F OC (cet))
(F OC he0 )
1] + ei = 0;
eq
0 0
e ( ce
t t
K
he0
) A0
e;
1
eA ;
1 1
e )
(F OC k0;1
e;
1
(F OC be0;1 )
cmin) = 0; t = 0; 1;
e ie
i 0
(F OC ie0 )
= 0:
(CSC (cet))
(CSC ie0 )
Assume
simplify
CSC (ce1 )
=)
e
1
=0
F OC (ce1 )
=)
e
1
= 1: We can
(F OC ie0 )
(1 + e0) q0 = A1;
e )
(F OC k0;1
(1 + e0) p0 = :
(F OC be0;1 )
2.3
= w0 = (1
w
1+ 0
) A0
K
he0
w
A1G0 k0;1
A1
= q0 =
e;
1+ w
1
+
0
0
1+
w
0
= p0 =
1+
(F OC (h0))
(F OC k0;1 )
e;
0
(F OC b0;1 )
e
F OC b0;1 =) w
0 = 0 = 0:
w
w = 0:
Given -symmetry, F OC k0;1 =) G0 k0;1
= 1 =) k0;1
e
In equilibrium, hw
0 = h0 = h0 : F OC (h0 ) then implies
h0 = (1
2
w0 = 4(1
) A0K (1 + 0)
) A0
K
1+ 0
1
1+
1
! 3 1+
2.4
Market clearing
Labor: hs0
Capital: k1s
e
hw
=
h
0
0
hd0
w + ke
ie0 + K = k0;1
0;1
e
Bonds: bw
0;1 + b0;1 = 0;
Final/intermediate goods
he0
y0d
e
e
cw
0 + c0 + i0 = A0 K
y1d
e = A G kw + A ke
cw
+
c
1 0;1
1
1
1
0;1
y0s;
y1s:
2.5
2.5.1
cw
0
F OC (ie0 )
=0=
=)
ce0
q0 = 1 (given
=) 0
F OC (b0;1 )
e ;be
F OC k0;1
0;1
e
i
= 0)
A1
=)
p0 = A1 or r0;1 =
1
1 > 0:
h0 = (1
w0 = (1
) A0K ( A1)
) A0
K
A1
1
1+
1
1+
@ ln(h )
@ ln(h )
1 =
0 ;
=) @ ln(A0 ) = 1+
@ ln(A1 )
0
@ ln(w )
@ ln(w )
1 &
0 =
=) @ ln(A0 ) = 1+
@ ln(A1 )
0
1+
@ ln(w h )
@ ln(w )
2 &
0 = 1
@ ln(A0 )0 = 1+
1+ :
@ ln(A1 )
0
@ ln(y )
@ ln(y )
2 &
0 = 1
=) @ ln(A0 ) = 1+
1+ ;
@ ln(A1 )
0
i0 = y0 (given c0 = 0);
w = 0; given F OC k w ; k e
k0;1
0;1 0;1 ;
@ ln(k )
2
e = i + K = k =)
1 =
k0;1
0
1
1+
@ ln(A0 )
@ ln(y )
2
y1 = A1 (1 + k1) =) @ ln(A1 ) = 1+
0
c 1 = y1 ;
q0 = 1;
i0
k1
i0
1+k1
@ ln(k )
i0
k1
i0
1+k1
p0 = 1=A1;
w0 h0 +B
bw
=
=
0;1
p0
=)h "
e
Increase in A0 =)0 y0 "=) i0 " (given c0 = 0) =) k1 = k0;1
"=) y1 " :
e
Increase in A1 =) h0 "=) y0 "=) i0 " (given c0 = 0) =) k1 = k0;1
"=)
y1 " :
2.5.2
F OC ie0 =) ie0 = 0
e = K; given k w = 0;
k0;1
0;1
cw
0
+ ce0
= y0 > 0
CSC(c0 )
=)
= 0;
h0 = (1
h; w:
) A0K
1
1+
@ ln(x )
@ ln(x )
1 &
0 = 0; x =
= w0 =) @ ln(A0 ) = 1+
@ ln(A1 )
0
y0 = A0K h10
@ ln(y )
@ ln(y )
2 &
0 = 0;
=) @ ln(A0 ) = 1+
@ ln(A1 )
0
c0 = y0 (given i0 = 0);
w = 0; given F OC k w ; k e
k0;1
0;1 0;1 ;
@ ln(k )
@ ln(k )
e = K = k =)
1 = 0 =
1 ;
k0;1
1
@ ln(A0 )
@ ln(A1 )
@ ln(y )
@ ln(y )
The entrepreneur nances her investment ie0 partly by using her internal funds N0
(net worth before the production of new capital goods) and partly by borrowing
k (denominated in new capital).
external funds ie0 N0 at the interest rate r0;1
k
Default if ie0 < 1 + r0;1
<
ie0
k
1 + r0;1
N0 or if
ie0
N0
ie0
k ):
= ( N0 ; ie0 ; r0;1
( ) (+) (+)
In case of default, the lender would pay the cost ie0 to observe the true value of
and then conscates the entrepreneurs residual assets (
) ie0:
Zero-prot condition for (intra-period loan made by) the lender:
n
q0 E < [(
) ie0] + E
k
1 + r0;1
e
k = rk
which denes implicitly r0;1
0;1 N0 ; i0 ; q0 :
(ie0
N0 )
io
= ie0
N0 ;
The entrepreneurs utility-maximization problem is the same as the one stated in the
baseline model except that her net worth after the production of new capital as
N = N (N0 ; q 0 ; )
i0 = i0 (N0; q0)
max 0; q0
arg max E
i0
n
ie0
k (N ; i ; q )
1 + r0;1
0 0 0
(i0
k (N ; i ; q )
1 + r0;1
0 0 0
N0 )
(ie0
oo
; where
o
N0 ) :
3.1
Focus on the latter case, esp. when N0 < i0 (N0; q0) < A0K h10
c0 > 0 and 0 = 0:
; so that
Labor employment h0 =
@ ln(x0 )
@ ln(A1 )
= 0; x = h; w:
(1
) A0K
@ ln(y )
1
1+
@ ln(x )
1
= w0 =) @ ln(A0 ) = 1+
0
@ ln(y )
2 &
0 = 0:
=) @ ln(A0 ) = 1+
@
ln(A
0
1)
&
3.1.1
Increase in A0
=)h "
A0 " =)0 y0 "=) e0 "=) N0 "=) i0 "=) k1 "=) y1 " :
e+q K
For eects to be bigger than in baseline model, we require N0
0
0
y0 "; which in turn requires B > q0K unlikely to hold empirically.
B ">
In other words, this kind of nancial friction would likely dampen the impact of a
transitory productivity shock.
3.1.2
Increase in A1
3.1.3
Quantitative performance
Financial accelerator models like this fail to amplify signicantly eects of productivity shocks, but can do so for other types (e.g., monetary-policy) of shocks.
The model could generate greater persistence, though, because k1 "=) N1 "
i1 "=) k2 "=) y2 " & N2 "
:::
k #
=)r1;2
=)
k #
=)r0;1
=)
k #
=)r2;3
=)
Friction #2:
enforcement) la Kiyotaki-Moore
Assume frictions in the enforcement of loan contracts, given borrowerss ability to
repudiate debt.
The following collateral constraint has to be added to the entrepreneurs utilitymaximization problem
be0;1
e :
q1k0;1
('0)
e )
(F OC k0;1
(1 + e0) p0 =
(F OC be0;1 )
+ '0 :
w ;
Combining F OC k0;1 with F OC b0;1 and noting that q1 = A1G0 k0;1
w =K
e ; we get
where k0;1
k0;1
'0 =
(1
G0 K
) G0 K
e
k0;1
e
k0;1
( )
4.1
'0 > 0 =) G0 K
e
k0;1
<1
But cw
0 = y0
w
F OC k0;1
=)
q0 = A1G0 K
e
k0;1
:
(q 0
e =N
p0q1) k0;1
0
e
0
+ q0 K
B;
Since q1 = A1G0 K
tion as
e
k0;1
e =
k0;1
w ;bw
F OC k0;1
0;1
1
1
q0
p0 ;
B
q0
4.1.1
Increase in A0
A0 "=) y0e (= y0) "=)
Direct eects:
(> y1w #) and y1 "
( ) e
e "=
) k0;1 "
0
w #) =) y e "
(but k0;1
1
e "=) q " = A G0 K
Indirect (amplication) eects: A0 "=) ::: =) k0;1
0
1
e " if B > e (i.e., if the entrepreneur is highly leveraged).
k0;1
0
e
k0;1
4.1.2
Increase in A1
e
e "
+ A1k0;1
k0;1
A1 "=) q0 " =
(
A1G0 K
e
k0;1
"=)
In other words, anticipated news could generate asset-price boom, but still no
impact eects on current output.
4.1.3
Quantitative performance
Reasons
direct eects of frictions are on investment, with marginal eects on capital and
labor (the factor inputs that produce output); V working capital model
low volatility of asset prices, which determine the stringency of the (endogenous)
borrowing constraint.
risk aversion(?)