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 University of Minnesota, Federal Reserve Bank of Minneapolis, CAERP, CEPR, NBER 1 th Csef- Igier Symposium on Economics and Institutions Anacapri June 214 Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 1/52

2 Facts on the last recession: I Real output Unemployment Consumption Investment Note: Except for unemployment, figures show percentage deviation from a linear trend. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 2/52

3 Facts on the last recession: II Wealth to output Debt to output Housing value to output Labor Quality adjusted Productivity Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 3/52

4 Summary of the facts Large decline in output, employment, consumption, and investment. Households deleveraging process: private debt and housing price plunged. Total factor productivity dropped. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 4/52

5 Objective: When can recessions be triggered by worse financial conditions faced by households? 1 Real frictions that make difficult to switch from production of consumption goods to exports or investment. Labor market frictions that limit wage adjustments. 2 Households differing in wealth and job market prospects. 3 Asset prices respond to market conditions: Both housing prices and the Stock Market are Endogenous 4 A financial system used widely by not-too-rich households to buy houses (loans have to be collateralized) which are inferior goods and not wanted by the super-rich. 5 Frictions in the goods market generate movements in measured TFP. We extend Huo and Ríos-Rull (213a) and Huo and Ríos-Rull (213b) in various ways to include a production sector and asset prices that allows us to talk about the U.S. recession. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 5/52

6 Findings A recession can be triggered by financial shocks to households. It shares most of the features of the Great Recession. Large reductions in assets (housing and stocks) prices. Lower than the data due to inexistence of default, foreclosures, and adjustment costs in house purchases. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 6/52

7 Model Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 7/52

8 Households: Preferences Continuum of households that live forever (β), are subject to uninsurable idiosyncratic and aggregate shocks. H holds care about quantities and number of varieties of nontradables. ( ) ρ IN c N = c 1 ρ Ni di Under equal consumption of each variety: c N I ρ N = [ IN 1 ρ c Ni di ] ρ 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, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 8/52

9 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, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 9/52

10 Production: two sectors tradables and nontradables. Nontradables Monopolistic firms, each one producing a different variety. Each firm/variety has many locations, and each location has its own production function. Labor can be partially reallocated to accommodate demand differences across locations. Firms post prices before the location is filled. Tradables (standard). Competitive. (Large) Adjustment costs to both capital and labor. Its output is used for exports, investment, and (part of) consumption. Decreasing returns. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 1/52

11 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, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 11/52

12 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 = Wages are determined via the following formula V 1 N. logw logw = ε w ( logy logy ) It simplifies things. Gornemann, Kuester, and Nakajima (212). Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 12/52

13 Assets markets: Financial assets and houses Total housing H is in fixed supply. Negative financial assets (b < ) are (undefaultable) mortgages. Its interest rate 1 q is predetermined at borrowing time, q(θ, b ) = { 1, if b 1 ς(θ), 1+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) = { 1 + r(s, S ), if b 1, if b <. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 13/52

14 State variables A household is characterized by {ɛ, e, a}. Let X denote the measure over types x = {ɛ, 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, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 14/52

15 Households problem V (S, ɛ, e, a) = subject to 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 (S ) Π ε ɛ,ɛ V [S, ɛ, e, a (S, b, h)] IN p i (S)c N,i + c T + p h (S)h + q(θ, b)b = a + 1 e=1 w(s)ɛ + 1 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, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 15/52 RE

16 Nontradable firms problem At each location, the production function is F N (k, l 1, l 2 ) = z N k α l α1 1 lα2 2 k and l 1 are pre-installed. l 2 is variable to meet different demands. The demand function is given by c(p i, S, x) = [ ] ρ pi 1 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 1 ) = ( c 1 ) z N k α l α1 1 α 2 1 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 1 ] D(S) Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 16/52

17 Nontradable firms problem Ω N (S, k, n) = max Ψ f [Q g (S)]p i i,v,p i l 1,l 2 c(p i, S, ɛ, e, a) dx w(s)l i κv + θ Π θ θ,θ Ω N (S, k, n ) 1 + r subject to l 2 Ψ f [Q g (S)] f l d(x, S) [c(p i, S, x), k, l 1 ] D(S) DC l 1 + l 2 = n ɛ(s) SL k = (1 δ k )k + i φ N (k, i) n = [1 δ n (S)]n + v S = G(S, θ ) LMK LML RE Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 17/52

18 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 = (1 δ k )k + i φ T,k (k, i) + θ Π θ θ,θ Ω T (S, k, n ) 1 + r l = n ɛ(s) n = [1 δ n (S)]n + v S = G(S). Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 18/52

19 Mutual fund Financial wealth in the economy is L + = b(s, ɛ, e, a) dx Mortgages in the economy are L = b> b< b(s, ɛ, 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) + 1 ) 1 + r L The realized rate of return is 1 + r(s, S ) = ΩN (S ) + Ω T (S ) + (1 + r )B + L L + Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 19/52

20 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, ɛ, e, a) dx, Nontradable prices satisfies p(s) = p i (S, K N, N N ) dx, Housing market clears h(s, ɛ, e, a) dx = H. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 2/52

21 Equilibrium Average separation probability and labor force quality ɛ δ n (S) = δ n(ɛ)n(ɛ) ɛ, ɛ(s) = ɛ n(ɛ) N N Rate of return to the mutual fund satisfies 1 + r(s, S ) = ΩN (S ) + Ω T (S ) + (1 + r )B + b(s, x) b< b(s, x) Wage satisfies 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, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 21/52

22 Mapping the Model to Data Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 22/52

23 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 v(h) = { ξh 1 σh 1 (h + h 1 ) 1 σ1 h, if h < ĥ ξ h (h + h 1 σh 2 2 ) 1 σ2 h, if h ĥ. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 23/52

24 Housing function with less curvature Housing function with more curvature Housing utility function Housing Consumption Engel Curve: consumption vs housing Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 24/52

25 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) = 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 Matching technology ( ) 2 ( ) i k δ k k, φ T,n (n, n) = εt,n n 2 2 n 1 n M(D, T ) = νd µ T 1 µ Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 25/52

26 Exogenously determined parameters A period is half a quarter. Parameter Value Risk aversion for consumption, σ c 2. Risk aversion for housing, σ 1 h 2. Risk aversion for housing, σ 2 h 1. Curvature of shopping, γ 1.5 Elasticity of substitution bw tradables and nontradables, η.8 Cutoff value for housing utility, ĥ 1.4 Price markup, ρ 1.1 Loan to value ratio, λ.75 Interest rate for international bonds, r 4% Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 26/52

27 Endogenously determined parameters: aggregate Target Value Parameter Value Wealth to output ratio 4.7 β.98 Housing value to output ratio 1.67 ξ h.95 Debt to output ratio.75 ɛ Share of tradables.3 ω.95 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 θ + θ 1 = 1 θ.23 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, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 27/52

28 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 4,1.156 Earning autocorrelation.91 Π ɛ 1,1.966 Earning stdev.2 Π ɛ 2, Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 28/52

29 Lorenz Curve Return 1 Data 1 Model Net worth Housing asset Financial asset Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 29/52

30 Experiments: once and for all set of surprises in the environment 1 Over the next 4.5 months the down payment changes from 25% to 27.5% to 3% to 32.5% (to avoid having households with empty choice set). 2 The borrowing interest rate s surcharge goes from zero to.3%. 3 Both at the same time. 4 The inverse process. Credit expansion. All of these with fixed and flexible wages. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 3/52

31 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, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 31/52

32 Experiment : gradual worsening of both λ and borrowing cost Real output Consumption Unemployment Investment Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 32/52

33 Experiment: gradual worsening of both λ and borrowing cost Wealth Debt Housing price Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 33/52

34 Experiment: gradual worsening of both λ and borrowing cost TFP with total hours Labor Productivity Labor quality TFP with total labor inputs Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 34/52

35 Experiment: gradual improvement of λ from.75 to Real output Consumption Unemployment Investment Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 35/52

36 Experiment: gradual improvement of λ from.75 to Wealth Debt Housing price Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 36/52

37 Experiment: gradual improvement of λ from.75 to TFP with total hours Labor Productivity Labor quality TFP with total labor inputs Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 37/52

38 Experiment 5: More flexible wage schedule Real output Unemployment Consumption Investment Flexible wage ɛ w =.45 Flexible wage ɛ w = 1 Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 38/52

39 Experiment 5: More flexible wage schedule Wealth Debt Housing price Flexible wage ɛ w =.45 Flexible wage ɛ w = 1 Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 39/52

40 Experiment 5: More flexible wage schedule TFP with total hours Labor Productivity Labor quality TFP with total labor inputs Flexible wage ɛ w =.45 Flexible wage ɛ w = 1 Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 4/52

41 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, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 41/52

42 References Aiyagari, S. Rao Uninsured Idiosyncratic Risk and Aggregate Saving. Quarterly Journal of Economics 19: 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. Fang, Lei and Jun Nie Education, Human Capital and U.S. Labor Market Dynamics. Presented at MidWest Macro Meetings. Gornemann, Nils, Keith Kuester, and Makoto Nakajima Monetary Policy with Heterogeneous Agents. Mimeo, FRB Philadelphia. Guerrieri, Veronica and Guido Lorenzoni. 29. Liquidity and Trading Dynamics. Econometrica 77 (6): Huggett, Mark The Risk-Free Rate in Heterogeneous-Agent, Incomplete-Insurance Economies. Journal of Economic Dynamics and Control 17: Huo, Zhen and José-Víctor Ríos-Rull. 213a. Balance Sheet Recessions. Working Paper, Federal Reserve Bank of Minneapolis.. 213b. Paradox of Thrift Recessions. Working Paper, Federal Reserve Bank of Minneapolis. Imrohoroğlu, A Cost of Business Cycles with Indivisibilities and Liquidity Constraints. Journal of Political Economy 97: Midrigan, V. and T. Philippon Household Leverage and the Recession. Working Paper FIN-11-38, New York University. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 42/52

43 Facts on the last recession: IV Return Debt to wealth Debt to housing value Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 43/52

44 Facts: Continued Return Real output Consumption Investment Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 44/52

45 Facts: Continued Return TFP with total hours Labor quality Labor productivity TFP with total labor inputs Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 45/52

46 Facts: Continued Real output, consumption and investment are Gross Domestic Product, Personal Consumption Expenditures and Gross Private Domestic Investment from BEA. TFP with total hours is calculated by Fernald (212). Labor productivity is total output divided by total hours. Labor quality follows Aaronson and Sullivan (21), which are extended by Bart Hobijn and Joyce Kwok (FRBSF). TFP with total labor inputs is total output divided by the product of total hours and labor quality. These variables shown at the beginning are deviations from their linear trends. These variables shown in the appendix have their values in 27 q4 normalized to 1. Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 46/52

47 Experiment 1: gradual change of λ from.75 to Real output Unemployment Consumption Flexible wage Investment Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 47/52

48 Experiment 1: gradual change of λ from.75 to Wealth Debt Housing price Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 48/52

49 Experiment 1: gradual change of λ from.75 to TFP with total hours Labor quality Labor Productivity TFP with total labor inputs Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 49/52

50 Experiment 2: gradual change of borrowing cost from to.3% Real output Unemployment Consumption Flexible wage Investment Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 5/52

51 Experiment 2: gradual change of borrowing cost from to.3% Wealth Debt Housing price Flexible wage Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 51/52

52 Experiment 2: gradual change of borrowing cost from to.3% TFP with total hours Labor Productivity Labor quality Flexible wage TFP with total labor inputs Fixed wage Huo & Ríos-Rull, UMN, Mpls Fed, CAERP Financial Frictions, Asset Prices, & the Great Recession 1 th Csef- Igier Symposium 52/52