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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Collateral constraints, idiosyncratic risk, and aggregate fluctuations |
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| Institution | University of Mannheim |
| Series Name | CDSE Discussion Paper |
| Number | 109 |
| Date | 2011 |
| Abstract Text | Theoretically, collateral constraints have the potential to strongly amplify and propagate aggregate shocks. However, the quantitative literature tends to find rather weak and non-robust effects. This paper tries to improve on this by modeling the interaction between idiosyncratic risk and collateral constraints. To this aim, agents' productivities as workers and entrepreneurs are assumed to evolve stochastically. This leads to a perpetual mismatch between wealth and skills, which is the reason for collateralized borrowing. The advantage of this modeling strategy is threefold: First, the evolution of skills can be measured empirically. In contrast, the heterogeneity in patience that the previous literature assumes to excite collateralized borrowing is not even intended as a serious micro-foundation. Second, idiosyncratic risk creates a non-degenerate distribution of wealth. As a consequence, the percentage of constrained agents changes as shocks hit the economy. Among other things, this generates recessions that are much sharper than booms. Last but not least, the impact of collateral constraints turns out to be larger and more robust in the setup with idiosyncratic risk compared to models with heterogeneity in patience. |
| Official URL | http://www.uni-mannheim.de/cds/cdse/dipa/109.pdf |
| Other Identification Number | merlin-id:4967 |
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