Asset-price channels and macroeconomic fluctuations

We estimate a dynamic general equilibrium model that features heterogenous agents, incomplete risk sharing, and collateralized debts. We obtain three empirical findings. First, the average rate of return on each asset in excess of the average loan rate, called the “excess return”, is quantitatively important on first order.

Second, the collateral constraint, through the asset-price channel, plays a critical role in amplifying and propagating aggregate fluctuations. Third, shocks to the household’s patience factor and housing demand are important in generating hump-shape impulse responses through distributional effects of net worths between the household and the entrepreneur.

For more information, contact Frank Schorfheide.