Financial Frictions, Asset Prices, and the Great Recession

Transcription

1 Financial Frictions, Asset Prices, and the Great Recession Zhen Huo and José-Víctor Ríos-Rull Yale University, University of Pennsylvania, UCL, CAERP Einaudi Institute for Economics and Finance Sunday 12 th March, 217 First Version April 213 Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 1/59

2 We have had a Great Recession Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 2/59

3 Facts on the last recession: output, unemp, cons, inv 8 Real output 1 Unemployment rate Consumption 3 Investment Note: Except for unemployment, figures show percentage deviation from a linear trend. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 3/59

4 Facts on the last recession: wealth, mortg, houses, pr h 5 Net worth to output.75 Mortgage debt to output Housing value to output 23 Housing price index Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 4/59

5 Facts on the last recession: productivity and labor quality 6 5 TFP: measured with total hours 6 4 Labor productivity Labor force quality.5 TFP: measured with total hours TFP: measured with total labor inputs Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 5/59

6 Culprit: Financial Shocks? When looking for triggers of the Great Recession some form of financial breakdown comes out in most popular explanations. Financing difficulties contribute to cut spending both of firms and households. Most of the action occurs via a demand reduction. Yet models have a hard time to deliver this. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 6/59

7 This paper Explores recessions that are triggered by shocks to households ability to borrow. What are the theoretical elements needed In the context of a modern macro model Production with Savings A lot of wealth Heterogeneity so that the financial frictions are not imposed Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 7/59

8 Findings: The answer is yes, provided there are (from +to-) 1 Real frictions that difficult the switch from production of consumption goods to exports or investment. 2 Houses with prices amenable to falling as they did in the data. 3 Frictions in the goods markets that generate movements in measured GDP. 4 Households that differ in job prospects. 5 Some labor market frictions that limit wage adjustments. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 8/59

9 Findings: The Recession that we generate Shares most of the features of the Great Recession: 1 A large decline in output, employment, consumption and investment. 2 Large reductions in assets (housing and stocks) prices. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 9/59

10 Model Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 1/59

11 The Model Characteristics: Steady State Enhanced Aiyagari Economy: 1 Multisector: Tradables and nontradables. 2 Houses (land) that need to be purchased to be enjoyed. 3 Endogenous productivity movements (frictions in goods markets). 4 Various job market frictions. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 11/59

12 Households: Preferences Continuum of households that live forever (β), are subject to uninsurable idiosyncratic. H holds care about quantities and number of varieties of nontradables. c N = ( IN c 1 ρ Ni di ) ρ = c Ni I ρ N 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 (goods market frictions). 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, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 12/59

13 Households: Endowments and Wealth Household skill type is ɛ, follows a Markov chain Γ ɛ,ɛ. Moves slowly and accommodates opportunities to get rich. Households either have a job e = 1 or not e =. Type-dependent exogenous job destruction rate δ ɛ 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(213)] ). 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, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 13/59

14 Goods markets Search frictions in the markets for nontradables: Households look for varieties. Random search. Richer people consume and search more. Cuts in consumption cut search which cuts productivity. Perfect competition and frictionless markets for tradables. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 14/59

15 Labor market Workers are rationed. Firms hire as many workers as they wish paying hiring costs. (like a vacancy filling probability of 1, with hiring costs). Employment: N = N N + N T. Same job finding probability across types: Φ e = V 1 N. Wages are exogenous (set to some aggregate target). Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 15/59

16 Assets markets: Financial assets and houses Total housing H is in fixed supply. Negative financial assets (b < ) are (undefaultable) mortgages. Its interest rate is predetermined: 1 1+r ς, if b <. Mortgages have to be collateralized by housing: if b < then [ ] 1 b [1 λ] p h h 1 + r ς Positive financial assets (b > ) are shares of a mutual fund. Its return, r, is determined ex-post (it matters when we hit the economy with shocks). Possible capital gains and loses. { 1 + r, if b R(b) = 1, if b <. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 16/59

17 Households problem V (ɛ, e, a) = max u(c A, h, d)+ c N,i,c T,I N,h,d β ɛ,e,θ Π θ θ,θ Πw e e,ɛ Πε ɛ,ɛ V [ɛ, e, a (b, h)] s.t. IN p i c N,i + c T + p h h + b = a + 1 e=1 wɛ + 1 e= w BC a (b, h) = p h h + R(b)b AA b λ p h h [ ] r ς FC I N = d Ψ d [Q g ] SC Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 17/59

18 Nontradables: Monopolistic Competition by Varieties Each firm/variety has any locations each. Some inputs are location specific. Others (type 2 labor) are not. Prices are posted before location is filled The demand function is given by Ψ f [Q g ] c[p i (ɛ, e, a), x] d(x, S) The firm has to make sure that it can satisfy the demand at all locations. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 18/59

19 Nontradable firms problem Ω N (k, n) = max Ψ f [Q g ]p i i,v,p i l 1,l 2 c(p i, ɛ, e, a) dx wl i κv + θ Π θ θ,θ Ω N (k, n ) 1 + r subject to l 2 Ψ f [Q g ] l 1 + l 2 = n ɛ f l d(x, S) [c(p i, x), k, l 1 ] D DC SL k = (1 δ k )k + i φ N (k, i) LMK n = [1 δ n ]n + v LML Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 19/59

20 Tradable firms are competitive and have adjustment costs Its output is used for exports, investment, and (part of) consumption. Decreasing returns. Ω T (k, n) = max i,v F T (k, l) wl i κv φ T,n (n, n) subject to k = (1 δ k )k + i φ T,k (k, i) + θ Π θ θ,θ Ω T (k, n ) 1 + r l = n ɛ n = [1 δ n ]n + v Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 2/59

21 Mutual fund Financial wealth in the economy is L + = b(ɛ, e, a) dx Mortgages in the economy are L = b> b< b(ɛ, e, a) dx Net foreign asset position of the country (the mutual fund owns all firms) ( B = L + Ω N π N + Ω T π T + 1 ) 1 + r L The realized rate of return is 1 + r = ΩN + Ω T + (1 + r )B + L L + Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 21/59

22 The Financial Shocks We now pose simultaneous (MIT) shocks to the Financial system: Both to 1 Loan to value ratio. λ 2 Markup on loans ζ Solve for the transition We have to take care of wages dynamics. They are determined via the following formula logw logw = ε w ( logy logy ) [Gornemann, Kuester, and Nakajima(212)]. Solving the transition implies solving for sequences for home prices, wages, nontradable prices. We assume the transition is completed in T periods. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 22/59

23 Mapping the Model to Data Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 23/59

24 Functional forms Preferences u(c A, h, d) = 1 1 σ c d (c 1+γ ) 1 σc A ξ d + v(h) 1 + γ where there is an Armington aggregator for consumption c A = [ ω (c N I ρ N ) η 1 η + (1 ω)c ] η η 1 η 1 η T and houses are inferior goods as a proxy for segmentation of housing markets ξ h log(h), if h < ĥ1 ξ v(h) = h 1 σ h h 1 σ h, if ĥ1 h ĥ2. ξ h h h, if h > ĥ 2. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 24/59

25 Housing Utility Function.4.2 Housing utility function Engel Curve: consumption vs housing Housing utility Housing Housing Consumption Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 25/59

26 Functional forms Production function F N (k, l 1, l 2 ) = z N k α l α1 1 l α2 2, F T (k, l) = z T k θ l θ1 Capital adjustment cost in the nontradable goods sector φ N (i, k) = ψ 2 ( ) 2 i k δ k k Capital and employment adjustment cost in the tradable goods sector φ T,k (i, k) = ψ 2 ( ) 2 i k δ k k, φ T,n (n, n) = ψ ( ) n 2 2 n 1 n Matching technology M(D, T ) = νd µ T 1 µ Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 26/59

27 Exogenously determined parameters Parameter Value Risk aversion for consumption, σ c 2. Satiation level for housing, h 5. Curvature of shopping, γ 1.5 Elasticity of substitution bw tradables and nontradables, η.8 Price markup, ρ 1.1 Loan to value ratio, λ.8 Interest rate for international bonds, r 4% Note: model period is half a quarter Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 27/59

28 Endogenously determined parameters: aggregate Target Value Parameter Value Wealth to output ratio 4. β.97 Housing value to output ratio 1.7 ξ h.54 Debt to output ratio.4 ɛ Fraction of housing held by bottom 7%.25 ĥ Fraction of housing held by bottom 8%.39 ĥ Fraction of housing held by bottom 9%.58 σ h 2.92 Share of tradables.3 ω.98 Occupancy Rate.81 ν.81 Capital to output ratio 2. δ k.1 Labor Share in nontradables.64 α.27 α 1 = α 2 α 1.36 Labor Share in tradables.66 θ 1.66 Vacancy cost to output ratio.2 κ.42 Home production to lowest earning ratio.5 w.7 Units Parameters Output 1 z N.93 Relative price of nontradables 1 z T.48 Market tightness in goods markets 1 ξ d.3 Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 28/59

29 Endogenously determined parameters: cross-section Lorenz Target Value Parameter Value Job duration for type year δ 1 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.48 Wealth Gini index.82 Π ɛ 1,4.7 Earnings Gini index.64 Π ɛ 4,1.58 Earning autocorrelation.91 Π ɛ 1, Earning stdev.2 Π ɛ 2,2.977 Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 29/59

30 Lorenz Curve Return Networth Housing 1.9 Model Data 1.9 Model Data Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 3/59

31 Dynamic Parameter I Real wage rule: log w t P t log w P = ϕw ( log Y t log Y ) Choose ϕ w =.55: match correlation between real output and real wage Consistent with the movement during the Great Recession Real output Real wage Approx wage: ϕ w =.3 Approx wage: ϕ w =.55 Approx wage: ϕ w = Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 31/59

32 Dynamic Parameter II Summary of Dynamic Parameters Parameter Value Target Adjustment cost, ψ 1.6 Decrease in investment: 3% DRS in tradables, θ.21 Increase in tradable sector: 4% Goods market matching elasticity in, µ.8 Decrease in TFP: 1.5% Wage elasticity, ϕ w.55 Ratio of wage to output change:.55 Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 32/59

33 Experiments: once and for all set of surprises 1 Over three months the down payment changes from 2% to 4% The borrowing interest rate s surcharge goes from zero to.5% 2 Decomposition: with only down payment or interest rate change 3 Role of asset price: constant housing price 4 Role of frictions: wage elasticity, matching frictions and adj costs 5 Allowing default: a larger drop of housing price 6 Credit cycle Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 33/59

34 Long Run Properties Typically like in all [Aiyagari(1994)] - [Bewley(1986)] - [Huggett(1993)] - [Imrohoroğlu(1989)] type models, in the long run output and wealth end up being higher. But in our economies the transition is associated to a recession. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 34/59

35 Experiment 1: Real output Unemployment Consumption Investment Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 35/59

36 Experiment 1: Wealth Debt Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 36/59

37 Experiment 1: TFP with total hours Labor Productivity Labor quality TFP with total labor inputs Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 37/59

38 Another Experiment: Constant Housing Prices.5 Constant housing price Constant housing price Real output Unemployment rate.2 Constant housing price 2 Constant housing price TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 38/59

39 Experiment 5: Allowing Households Holding no Housing 3% of households hold zero houses in the United States Change preference slightly to match this moment ξ h log(h + h), if h < ĥ1, ξ h ( ) v(h) = 1 σ h h + ξ 1 1 σh h + ξh 2, if ĥ1 h ĥ2, ξh 3 h 2 (h h) 2 + ξh 4, if h > ĥ2. Similar aggregate response, but richer cross-sectional implications Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 39/59

40 Experiment 5: Aggregate Response.5 Extension: allowing no housing Extension: allowing no housing Real output Unemployment rate Extension: allowing no housing 2 Extension: allowing no housing TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 4/59

41 Experiment 5: Cross-Sectional Effects Wealth 4 2 Consumption This agrees with the evidence in [Petev, Pistaferri, and Eksten(212)] and [Parker and Vissing-Jorgensen(29)] Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 41/59

42 Experiment 6: Allowing Default Borrowing interest rate s surcharge goes from zero to 1%. Housing price drops more than 2%, and agents may be underwater. Allow borrowers to default, but savers suffer from the capital loss. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 42/59

43 Experiment 6: Allowing Default Total saving in financial wealth in the economy is L +,t = b t(ɛ, e, a) dx Mortgages in the economy are L,t = b> b< b t(ɛ, e, a) dx Net foreign asset position of the country ( B t = L +,t Ω N t πt N + Ω T t πt T + 1 ) 1 + r L,t The realized rate of return in next period is 1 + r t+1 = ΩN t+1 + Ω T t+1 + (1 + r )B t L + b< I p h,t+1 h t (ɛ,e,a)+b t (ɛ,e,a)>[p h,t+1 h t(ɛ, e, a) + b t(ɛ, e, a)] dx L + Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 43/59

44 Experiment 6: Allowing Default.5 Allow default Allow default Real output Unemployment rate Allow default Allow default TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 44/59

45 Experiment 7: Credit Cycle Loan to value ratio λ Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 45/59

46 Experiment 7: Credit Cycle Real output Unemployment rate TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 46/59

47 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 The literature is trying hard to get this ([Midrigan and Philippon(211)], [Guerrieri and Lorenzoni(29)]) with limited success. Still ways to go: Foreclosures; slow housing frictions; Long term Mortgages. Slow expanding export industries. Model of banking cycles. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 47/59

48 Thank you very much Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 48/59

49 American Time Use Survey Data on Shopping Time Year Year Total Shopping Time Trend Shopping time on services Trend Total shopping time Shopping time on services Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 49/59

50 The working of financial shocks that hit the production side [Bernanke and Gertler(1989)], [Bernanke, Gertler, and Gilchrist(1999)] Firms cannot borrow as much. Not all good projects will be undertaken. Cash rich firms expand at the expense of cash poor firms. In fact there is some of this in the data: Since 27 employment of the young firms went down by 24.5% and in 212 it was at the historically lowest level. Firms make themselves vulnerable by being close to their credit limit to improve their bargaining position over wages [Monacelli, Quadrini, and Trigari(211)] Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 5/59

51 Why was there a financial shock? (what was the trigger?) Increased variance in the cross-sectional returns of firms [Bloom(29)], [Bloom et al.(211)bloom, Floetotto, Jaimovich, and Saporta] [Arellano, Bai, and Kehoe(212)], [Christiano, Motto, and Rostagno(214)] [Dyrda(215)]. Straight shocks to credit constraints [Jermann and Quadrini(212)], [Perri and Quadrini(211)], [Macera(215)]. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 51/59

52 What have we learned It is hard to get a large recession only from the product side and only from lower investment. The largest success (to my knowledge) ([Arellano, Bai, and Kehoe(212)]) works by having the financial shocks increase the probability of default and inducing firms to pursue very conservative use of inputs despite their almost normal productivity. Still it is hard to have a reduction of marginal cash to create a large recession ([Zetlin-Jones and Shourideh(212)]). It may have played a larger role in the expansion of new firms ([Dyrda(215)]) Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 52/59

53 References Aiyagari, S. Rao Uninsured Idiosyncratic Risk and Aggregate Saving. Quarterly Journal of Economics 19 (3): Arellano, Cristina, Yan Bai, and Patrick J. Kehoe Financial Frictions and Fluctuations in Volatility. Federal Reserve Bank of Minneapolis Research Department Sta Report. Bernanke, B. and M. Gertler Agency Costs, Net Worth, and Business Fluctuations. American Economic Review 79 (1): Bernanke, Ben S., Mark Gertler, and Simon Gilchrist The financial accelerator in a quantitative business cycle framework. In Handbook of Macroeconomics, Handbook of Macroeconomics, vol. 1, edited by J. B. Taylor and M. Woodford, chap. 21. Elsevier, URL Bewley, Truman Stationary Monetary Equilibrium with a Continuum of Independently Fluctuating Consumers. In Contributions to Mathematical Economics in Honor of Gérard Debreu, edited by Werner Hildenbrand and Andreu Mas-Colell. Amsterdam: North Holland. Bloom, Nicholas. 29. The Impact of Uncertainty Shocks. Econometrica 77 (3): URL Bloom, Nicholas, Max Floetotto, Nir Jaimovich, and Itay Saporta Really Uncertain Business Cycles. Mimeo Stanford University. Christiano, Lawrence, Roberto Motto, and Massimo Rostagno Risk Shocks. American Economic Review 14 (1): Dyrda, Sebastian Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 53/59

54 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 = d(ɛ, e, a) dx, Nontradable prices satisfies p = p i (K N, N N ) dx, Housing market clears h(ɛ, e, a) dx = H. Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 54/59

55 Equilibrium Average separation probability and labor force quality ɛ δ n = δ n(ɛ)n(ɛ) ɛ, ɛ = ɛ n(ɛ) N N Rate of return to the mutual fund satisfies 1 + r = ΩN + Ω T + (1 + r )B + b< b(x) b> b(x) Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 55/59

56 Experiment 2 : Only λ or r Change.5 Only λ change Only r change Only λ change Only r change Real output Unemployment rate.2 Only λ change Only r change 2 Only λ change Only r change TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 56/59

57 Experiment 4.1: Wage Elasticity.5 High wage elasticity: ϕ w = High wage elasticity: ϕ w = Real output Unemployment rate.2 High wage elasticity: ϕ w = 1. 2 High wage elasticity: ϕ w = TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 57/59

58 Experiment 4.2: Adjustment Cost.5 Low adjustment cost Low adjustment cost Real output Unemployment rate.2 Low adjustment cost 2 Low adjustment cost TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 58/59

59 Experiment 4.3: Goods Market Frictions.5 Low matching elasticity: µ = Low matching elasticity: µ = Real output Unemployment rate.4.2 Low matching elasticity: µ =.5 2 Low matching elasticity: µ = TFP Housing price Huo & Ríos-Rull, Yale, Penn, UCL, CAERP Financial Frictions, Asset Prices, & the Great Recession EIEF 59/59