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HETEROGENEITY AND REDISTRIBUTION IN FINANCIAL CRISES

Published online by Cambridge University Press:  01 August 2016

Keiichiro Kobayashi  and
Daichi Shirai
Keiichiro Kobayashi*
Affiliation:
Keio University, The Canon Institute for Global Studies and The Research Institute of Economy, Trade and Industry
Daichi Shirai
Affiliation:
The Canon Institute for Global Studies
*
Address correspondence to: Keiichiro Kobayashi, Faculty of Economics, Keio University, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan; e-mail: kobayasi@econ.keio.ac.jp.
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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.

Keywords

HeterogeneityBorrowing ConstraintRedistribution of WealthLabor Wedge
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1527 - 1549
Copyright
Copyright © Cambridge University Press 2016 

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