Zhen Huo and José-Víctor Ríos-Rull. University of Minnesota, Federal Reserve Bank of Minneapolis, CAERP, CEPR, NBER

Transcription

1 Financial Frictions, Asset Prices, and the Great Recession Zhen Huo and José-Víctor Ríos-Rull University of Minnesota, Federal Reserve Bank of Minneapolis, CAERP, CEPR, NBER University of Mannheim Sept 24, 23 Very Preliminary, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim / 65

2 Facts on the last recession: I Real output Unemployment Consumption Investment, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 2 / 65

3 Facts on the last recession: II Wealth to output Debt to output Housing value to output Housing price index, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 3 / 65

4 Facts on the last recession: III TFP with total hours Labor productivity Labor quality TFP with total labor inputs, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 4 / 65

5 Summary of the facts Large decline in main aggregate variables Households deleveraging process: private debt and housing price plunged Total factor productivity dropped, but labor productivity and labor quality increased, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 5 / 65

6 Objective of this project To explore the quantitative properties of environments where recessions are caused by worse financial conditions faced by households These environments have Real frictions that make difficult to switch from production of consumption goods to exports or investment 2 Households differing in wealth and job market prospects 3 A financial system used widely by households to buy houses which are inferior goods and not wanted by the super-rich 4 Asset prices respond to market conditions 5 Frictions in the goods market generate movements in measured TFP, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 6 / 65

7 Ingredients of this project It is a small open Aiyagari/Krusell-Smith economy with a housing market and a stock market Borrowing has to be collateralized by the value of housing The financial terms available are the financial conditions and are subject to shocks Like in Huo & Rios-Rull(3) there are goods market frictions that generate TFP losses, job market frictions, and adjustment costs to move into tradable production, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 7 / 65

8 Findings A recession can be triggered by financial shocks to households It shares most of the features of the Great Recession Insufficient reductions in assets (housing and stocks) prices For now!!, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 8 / 65

9 The Model, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 9 / 65

10 Households: Preferences Continuum of households that live forever (β), are subject to uninsurable idiosyncratic and aggregate shocks Hholds care about quantities and number of varieties of nontradables c N = ( IN c ρ Ni di ) ρ Under equal consumption of each variety: cn I ρ N = [ IN ] ρ ρ c Ni di Households have to search for varieties, its number is a choice I N = d Ψ d (Q g ) Ψ d (Q g ): Probability (per search unit) of finding a variety Households also like tradables and housing and dislike goods searching u [c A (c N I ρ N, c T ), h, d], Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim / 65

11 Households: Endowments and Wealth Household skill type is ϵ, follows a Markov chain Γ ϵ,ϵ Moves slowly and accommodates opportunities to get rich Households either have a job e = or not e = Type-dependent exogenous job destruction rate δ ϵ n Job finding rate is type independent and depends on job creation by firms (workers are rationed, it is like no matching function in labor market but hiring costs) (Fang and Nie (23)) Households have assets a These assets can be allocated to (frictionless) houses and/or to financial assets with a collateral constraint The poor will have some housing wealth and a mortgage, the rich houses and shares of the economy s mutual fund, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim / 65

12 Production: two sectors tradables and nontradables Tradables Measure one of competitive firms (Large) Adjustment costs to both capital and labor Its output is used for exports, investment, and (part of) consumption F T (k, l) may have decreasing returns Nontradables Measure one of monopolistic firms each one producing a different variety Each firm/variety has a measure one of locations, each location has its own production function F N (k, l, l 2 ) l Committed to the location (Sales staff) l 2 Can be reallocated within the period (Production Staff ) Locations may or may not be filled (get a customer) They produce only for consumption Firms post prices before the location is filled, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 2 / 65

13 Goods markets Perfect competition and frictionless markets for tradables Search frictions in the markets for nontradables: Households look for varieties CRS matching function M(D, ) Market tightness is Q g = D Random search There is no possibility of attracting more customers with lower prices (we are working on a paper where there is shopping and searching simultaneously) The probability that a shopper finds a firm-variety: Ψ d (Q g ) = M D The probability that a firm finds a shopper is the measure of filled locations or of consumers buying the good: Ψ f (Q g ) = M = M(D, ), Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 3 / 65

14 Labor market Workers are rationed Firms hire as many workers as they wish paying hiring costs (like a vacancy filling probability of, with hiring costs) Employment: N = N N + N T Same job finding probability across types: Φ e = Wages are determined via the following formula V N logw logw = ε w ( logy logy ) It simplifies things Gornemann, Kuester, and Nakajima (22), Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 4 / 65

15 Assets markets: Financial assets and houses Total housing H is in fixed supply Negative financial assets (b < ) are (undefaultable) mortgages Its interest rate q is predetermined at borrowing time, q(θ, b ) = {, if b ς(θ), +r if b < Mortgages have to be collateralized by housing q(θ, b) b λ(θ) p h (S) h Positive financial assets (b > ) are shares of a mutual fund Its return is stochastic Possible Capital gains and loses The return is R(S, S, b) = { + r(s, S ), if b, if b <, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 5 / 65

16 State variables A household is characterized by {ϵ, e, a} Let X denote the measure over types x = {ϵ, e, a} The vector of aggregate state variables is S = {θ, B, K N, K T, N N, N T, X } Here B is the net foreign asset position K and N are predetermined factor inputs Hence either we do Krusell-Smith or the transition after an unforeseen shock Today, we do the latter, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 6 / 65

17 Households problem V (S, ϵ, e, a) = subject to max u(c A, h, d)+ c N,i,c T,I N,h,d β ϵ,e,θ Π θ θ,θ Πw e e,ϵ (S ) Π ε ϵ,ϵ V [S, ϵ, e, a (S, b, h)] IN p i (S)c N,i + c T + p h (S)h + q(θ, b)b = a + e= w(s)ϵ + e= w BC a (S, b, h) = p h (S )h + R(S, S, b)b AA q(θ, b)b λ(θ)p h (S)h FC I N = d Ψ d [Q g (S)] SC S = G(S, θ ), Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 7 / 65 RE

18 Nontradable firms problem At each location, the production function is F N (k, l, l 2 ) = z N k α l α lα 2 2 k and l are pre-installed l 2 is variable to meet different demands The demand function is given by c(p i, S, x) = [ ] ρ pi ρ p(s) c N (S, x) When a shopper wants to buy c units of goods at a location, the amount of variable labor l 2 needed to produce c is f l (c, k, l ) = ( c z N k α ) l α α 2 At the posted price p i, the total variable labor needed is l 2 Ψ f [Q g (S)] f l d(x, S) [c(p i, S, x), k, l ] D(S), Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 8 / 65

19 Nontradable firms problem Ω N (S, k, n) = max Ψ f [Q g (S)]p i i,v,p i l,l 2 c(p i, S, x) dx w(s)l i κv + θ Π θ θ,θ Ω N (S, k, n ) + r subject to l 2 Ψ f [Q g (S)] f l d(x, S) [c(p i, S, x), k, l ] D(S) DC l + l 2 = n ϵ(s) SL k = ( δ k )k + i ϕ N (k, i) n = [ δ n (S)]n + v S = G(S, θ ) LMK LML RE, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 9 / 65

20 Tradable firms problem Ω T (S, k, n) = max i,v F T (k, l) w(s)l i κv ϕ T,n (n, n) subject to k = ( δ k )k + i ϕ T,k (k, i) l = n ϵ(s) n = [ δ n (S)]n + v S = G(S) + θ Π θ θ,θ Ω T (S, k, n ) + r, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 2 / 65

21 Mutual fund Financial wealth in the economy is L + = Mortgages in the economy are L = b> b< b(s, ϵ, e, a) dx b(s, ϵ, e, a) dx Net foreign asset position of the country (the mutual fund owns all firms) ( B = L + Ω N (S) π N (S) + Ω T (S) π T (S) + ) + r L The realized rate of return is + r(s, S ) = ΩN (S ) + Ω T (S ) + ( + r )B + L L +, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 2 / 65

22 Equilibrium An equilibrium is a set of decision rules and values for households, firms values and decision rules, and a set aggregate variables of aggregate states, such that: Households and firms policy functions and value functions solve the corresponding program problems Aggregate searching consistence D(S) = d(s, x) dx, Nontradable prices satisfies p(s) = p i (S, K N, N N ) dx, Housing market clears h(s, x) dx = H, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 22 / 65

23 Equilibrium Average separation probability and labor force quality ϵ δ n (S) = δ n(ϵ)n(ϵ) ϵ, ϵ(s) = ϵ n(ϵ) N N Rate of return to the mutual fund satisfies Wage satisfies + r(s, S ) = ΩN (S ) + Ω T (S ) + ( + r )B + b(s, x) b< b(s, x) b> logw(s) logw = ε w ( logy (S) logy ) The law of motion G(S) is consistent with households decisions and employment dynamics, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 23 / 65

24 Mapping the Model to Data, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 24 / 65

25 Functional forms Preferences u(c A, h, d) = d (c +γ ) σc A ξ d + v(h) σ c + γ where there is an Armington aggregator for consumption c A = [ ω (c N I ρ N ) η η + ( ω)c η η T ] η η and houses are inferior goods v(h) = { ξh σh (h + h ) σ h, if h < ĥ ξ h (h + h σh 2 2 ) σ2 h, if h ĥ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 25 / 65

26 Housing function with less curvature Housing function with more curvature Housing utility function Housing Consumption Policy function: consumption vs housing, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 26 / 65

27 Functional forms Production function F N (k, l, l 2 ) = z N k α l α l α 2 2, F T (k, l) = z T k θ l θ Capital adjustment cost in the nontradable goods sector ϕ N (i, k) = εn 2 ( ) 2 i k δ k k Capital and employment adjustment cost in the tradable goods sector ϕ T,k (i, k) = εt,k 2 ( ) 2 ( ) i k δ k k, ϕ T,n (n,n εt n 2, n) = 2 n n Matching technology M(D, T ) = νd µ T µ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 27 / 65

28 Exogenously determined parameters A period is half a quarter Parameter Value Risk aversion for consumption, σ c 2 Risk aversion for housing, σ c 2 Risk aversion for housing, σ 2 c Curvature of shopping, γ 2 Elasticity of substitution bw tradables and nontradables, η 8 Cutoff value for housing utility, ĥ 2 Price markup, ρ Loan to value ratio, λ 85 Interest rate for international bonds, r 4%, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 28 / 65

29 Endogenously determined parameters: aggregate Target Value Parameter Value Wealth to output ratio 47 β 985 Housing value to output ratio 67 ξ h 6 Debt to output ratio 75 ϵ 4 25 Share of tradables 3 ω 95 Occupancy Rate 8 ν 8 Capital to output ratio 275 δ k 6 Labor Share in nontradables 64 α 27 α = α 2 α 36 Labor Share in tradables 66 θ 66 4θ + θ = θ 23 Vacancy cost to output ratio 2 κ 42 Home production to lowest earning ratio 5 w 7 Units Parameters Output z N 85 Relative price of nontradables z T 44 Market tightness in goods markets ξ d 3, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 29 / 65

30 Endogenously determined parameters: cross-section Target Value Parameter Value Job duration for type 5 year δ n 83 Job duration for type 3 5 year δ 3 n 25 Job duration for type 4 5 year δ 4 n 25 Unemployment rate 6% δ 2 n 47 Wealth Gini index 82 Π ϵ,4 3 Earning Gini index 64 Π ϵ 4, 3 Earning autocorrelation 95 Π ϵ, 9894 Earning stdev 2 Π ϵ 2,2 986 Transition matrix ϵ ϵ 2 ϵ 3 ϵ 4 ϵ ϵ ϵ ϵ Skill Value , Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 3 / 65

31 Dynamic parameters Target Value Parameter Value Decrease of investment 35% ε N 25 Increase of tradable output 5% ε T,n 28 Symmetry of tradable adjustment costs ε T,k = ε T,n ε T,k 28 Decrease of TFP % µ 5 Wage elasticity wrt output 45 ε w 45, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 3 / 65

32 Experiments: Financial Shocks, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 32 / 65

33 Experiments Decrease the loan to value ratio from 85 to 75 in period, with flexible and fixed wage 2 Decrease the loan to value ratio from 85 to 75 gradually in 4 years, with flexible and fixed wage 3 Increase the interest rate for borrowing from 4% to 43% in period, with flexible and fixed wage 4 increase the interest rate for borrowing from 4% to 43% gradually in 4 years, with flexible and fixed wage 5 increase both the loan to value ratio from 85 to 75, and the interest rate for borrowing from 4% to 43% gradually in 4 years, with flexible wage, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 33 / 65

34 : Sudden change of λ Flex w Fixed w Real output Unemployment Consumption Investment, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 34 / 65

35 Sudden change of λ, Flex w Fixed w Wealth Debt Housing price, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 35 / 65

36 Sudden change of λ, Flex w Fixed w TFP with total hours Labor Productivity Labor quality TFP with total labor inputs, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 36 / 65

37 Sudden change of λ, Flex w Fixed w Nontradable sector Tradable sector Net export/output ratio Aggregate search, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 37 / 65

38 Fate of the different types, flexible wage 5 5 Type Type 2 Type 3 Type Type Type 2 Type 3 Type Housing Debt 4 2 Type Type 2 Type 3 Type Type Type 2 Type 3 Type Consumption Unemployment rate, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 38 / 65

39 2, slow change of λ Flex w Fixed w Real output Unemployment Consumption Investment, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 39 / 65

40 2, slow change of λ Flex w Fixed w Wealth Debt Housing price, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 4 / 65

41 2, slow change of λ Flex w Fixed w TFP with total hours Labor Productivity Labor quality TFP with total labor inputs, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 4 / 65

42 3 Sudden ς, Flex w Fixed w Real output Unemployment Consumption Investment, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 42 / 65

43 3 Sudden ς, Flex w Fixed w Wealth Debt Housing price, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 43 / 65

44 3 Sudden ς, Flex w Fixed w TFP with total hours Labor Productivity Labor quality TFP with total labor inputs, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 44 / 65

45 4, Slow ς, Flex w Fixed w Real output Unemployment Consumption Investment, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 45 / 65

46 4, slow ς, Flex w Fixed w Wealth Debt Housing price, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 46 / 65

47 4, slow ς, Flex w Fixed w TFP with total hours Labor Productivity Labor quality TFP with total labor inputs, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 47 / 65

48 5, slow change of λ and ς, Flex w Fixed w Real output Unemployment Consumption Investment, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 48 / 65

49 5, slow change of λ and ς, Flex w Fixed w Wealth Debt , Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Housing Frictions & Great price Recessions University of Mannheim 49 / 65

50 5, slow change of λ and ς, Flex w Fixed w TFP with total hours Labor Productivity Labor quality TFP with total labor inputs, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 5 / 65

51 Results: larger TFP drop? Sudden change of λ with µ = TFP with total hours Labor Productivity Labor quality TFP with total labor inputs, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 5 / 65

52 Model properties All the experiments generate Drop of output, employment, investment and consumption Drop of wealth, housing price and debt Drop of total productivity, increase of labor quality and labor productivity With fixed wage, the recovery of employment is much slower With slow change of the financial condition, the initial drop of debt is smaller, which is the case in the data A decrease of the loan to value ratio λ and an increase of borrowing cost have similar effects, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 52 / 65

53 Results: an expansion? Change λ from 75 to Real output Unemployment Consumption Sudden change of λ Investment Slow change of λ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 53 / 65

54 Results: an expansion? Change λ from 75 to Wealth Debt Sudden change of λ Housing price Slow change of λ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 54 / 65

55 Results: an expansion? Change λ from 75 to TFP with total hours Labor Productivity Labor quality Sudden change of λ TFP with total labor inputs Slow change of λ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 55 / 65

56 Results: a boom and bust cycle Loan to value ratio λ Sudden change of λ Slow change of λ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 56 / 65

57 Results: a boom and bust cycle Real output Unemployment Consumption Sudden change of λ Investment Slow change of λ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 57 / 65

58 Results: a boom and bust cycle Wealth Debt Housing price, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 58 / 65

59 Results: a boom and bust cycle TFP with total hours Labor Productivity Labor quality Sudden change of λ TFP with total labor inputs Slow change of λ, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 59 / 65

60 Model properties All the experiments generate Drop of output, employment, investment and consumption Drop of wealth, housing price and debt Drop of total productivity, increase of labor quality and labor productivity With fixed wage, the initial drop of employment is larger and the recovery is much slower With slow change of the financial condition, the initial drop of debt is smaller, which is the case in the data A decrease of the loan to value ratio λ and an increase of borrowing cost have similar effects, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 6 / 65

61 Insufficient drop of housing price In the data: housing price 2%, housing value 36% In the model: housing price 6% to 4% Problem: Rich households with deep pockets pick up the slack Not so much in the real world Large decline of housing price may force poor households default their debt Not allowed in the model Solution: Housing utility function with more curvature Smaller initial load to value ratio λ gives larger room for drop of housing price without default, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 6 / 65

62 Housing utility function A three-piece housing utility function A B C A: greater curvature to prevent rich households from expanding houses B: greater curvature to prevent super rich households from expanding houses C: upper bound for housing holding, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 62 / 65

63 Housing as a function of consumption Consumption Rich households will not increase their housing by much due to decreasing marginal utility Housing price has to drop more to induce poor households not to sell their houses, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 63 / 65

64 Conclusions We have a recession generated purely by increased difficulties to borrow on the part of households The recession comes together with TFP loses Drop in Housing prices (movements too sharp because of lack of house frictions) Drop in Stock Market Still insufficient drop in asset prices The literature is trying hard to get this (Midrigan and Philippon (2), Guerrieri and Lorenzoni (29)) with limited success Still ways to go, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 64 / 65

65 References Fang, Lei and Jun Nie 23 Education, Human Capital and US Labor Market Dynamics Presented at MidWest Macro Meetings Gornemann, Nils, Keith Kuester, and Makoto Nakajima 22 Monetary Policy with Heterogeneous Agents Mimeo, FRB Philadelphia Guerrieri, Veronica and Guido Lorenzoni 29 Liquidity and Trading Dynamics Econometrica 77 (6):75 79 Midrigan, V and T Philippon 2 Household Leverage and the Recession NYU Working Paper FIN--38, New York University, Huo & Ríos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 65 / 65