SGER: Durable Goods, Borrowing Constraints and the Business Cycle

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

This Small Grant for Exploratory Research supports a quantitative study of how households borrowing constraints interact with aggregate activity over the business cycle. In particular it explores how shocks to fundamentals (technology, wealth distribution or fiscal policy among others) might generate large and persistent fluctuations through their feedback with borrowing constraints. The project also evaluates the effects of exogenous changes in the credit markets structure on the quantitative properties of the business cycle. The key new element will be the presence of durables goods. These goods will play a dual role, both delivering direct utility and providing collateral services to the households that own them. This second role will induce a new and powerful transmission mechanism from shocks to fundamentals. The importance of durable goods in this research project is motivated by their high participation in output and wealth. The project will help answer questions like what are the effects of borrowing constraints on aggregate activity? And what are the effects of policy changes that affect these constraints? This project is part of a broad attempt to explicitly incorporate individual heterogeneity into macroeconomics, in order to study how the interaction between individual behavior and macroeconomic aggregates moves in response to changes in economic policy.