Location: PWBM’s Philadelphia Office
Date / Time: Tuesday, February 19, 2019, 12:00 PM - 1:30 PM

Jesús Fernández-Villaverde, Professor of Economics and Director of Graduate Studies in the Economics Department at the University of Pennsylvania, presented on the paper Financial Frictions and the Wealth Distribution.

Abstract:

We postulate a continuous-time model of financial frictions à la Basak and Cuoco (1998) and Brunnermeier and Sannikov (2014), but with a non-trivial distribution of wealth among households. We show how such a model can be efficiently computed, despite its substantial non-linearities and time-varying wealth distributions, using tools from machine learning. We illustrate how the model can be structurally estimated with a likelihood function with aggregate and micro observations, using tools from inference with diffusions. Regarding results, we document, first, the strong non-linearities created by financial frictions. Second, we report the existence of multiple stochastic steadystates with properties that differ from the deterministic steady state along important dimensions. Third, we illustrate how the generalized impulse-response functions of the model are highly state-dependent. In particular, we find that the recovery after a negative aggregate shock is more sluggish when the financial expert is more leveraged. Fourth, we prove that wealth heterogeneity matters in this economy because of the asymmetric responses of household consumption decisions to aggregate shocks.