Financial Frictions, Asset Prices, and the
Great Recession
Zhen Huo and José-Vı́ctor Rı́os-Rull
University of Minnesota, Federal Reserve Bank of Minneapolis, CAERP, CEPR, NBER
10th Csef- Igier Symposium on Economics and Institutions
Anacapri 24 - 27 June 2014
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Facts on the last recession: I
6
10
4
9
2
8
0
7
−2
6
−4
5
−6
−8
2004
2006
2008
2010
2012
4
2004
Real output
2006
2008
2010
2012
Unemployment
6
30
4
20
2
10
0
0
−2
−10
−4
−20
−6
−30
−8
−10
2004
2006
2008
2010
Consumption
2012
−40
2004
2006
2008
2010
2012
Investment
Note: Except for unemployment, figures show percentage deviation from a linear trend.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Facts on the last recession: II
5
0.8
4.8
0.75
4.6
0.7
4.4
4.2
0.65
4
0.6
3.8
0.55
3.6
2004
2006
2008
2010
2012
2004
2006
2008
2010
2012
Debt to output
Wealth to output
1.8
4
1.7
3
2
1.6
1
1.5
0
1.4
−1
1.3
−2
1.2
−3
1.1
1
−4
2004
2006
2008
2010
2012
Housing value to output
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
−5
2004
2006
2008
2010
2012
Labor Quality adjusted Productivity
Financial Frictions, Asset Prices, & the Great Recession
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Summary of the facts
Large decline in output, employment, consumption, and investment.
Households deleveraging process: private debt and housing price
plunged.
Total factor productivity dropped.
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Financial Frictions, Asset Prices, & the Great Recession
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Objective: When can recessions be triggered by worse financial
conditions faced by households?
1
Real frictions that make difficult to switch from production of
consumption goods to exports or investment. Labor market frictions
that limit wage adjustments.
2
Households differing in wealth and job market prospects.
3
Asset prices respond to market conditions: Both housing prices and
the Stock Market are Endogenous
4
A financial system used widely by not-too-rich households to buy
houses (loans have to be collateralized) which are inferior goods and
not wanted by the super-rich.
5
Frictions in the goods market generate movements in measured TFP.
We extend Huo and Rı́os-Rull (2013a) and Huo and Rı́os-Rull (2013b) in various
ways to include a production sector and asset prices that allows us to
talk about the U.S. recession.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Findings
A recession can be triggered by financial shocks to households.
It shares most of the features of the Great Recession.
Large reductions in assets (housing and stocks) prices.
Lower than the data due to inexistence of default, foreclosures, and
adjustment costs in house purchases.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Model
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Financial Frictions, Asset Prices, & the Great Recession
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Households: Preferences
Continuum of households that live forever (β), are subject to
uninsurable idiosyncratic and aggregate shocks.
H’holds care about quantities and number of varieties of nontradables.
!ρ
Z
IN
cN =
0
1
ρ
cN
i di
Under equal consumption of each variety:
cN IρN =
R IN
0
ρ
1
ρ
cN
di
i
Households have to search for varieties, its number is a choice.
IN = d Ψd (Qg )
Ψd (Qg ): Probability (per search unit) of finding a variety.
Households also like tradables and housing and dislike goods searching
u [cA (cN IρN , cT ), h, d]
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Financial Frictions, Asset Prices, & the Great Recession
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Households: Endowments and Wealth
Household skill type is , follows a Markov chain Γ,0 . Moves slowly
and accommodates opportunities to get rich.
Households either have a job e = 1 or not e = 0.
Type-dependent exogenous job destruction rate δn .
Job finding rate is type independent and depends on job creation by
firms (workers are rationed, it is like no matching function in labor
market but hiring costs) (Fang and Nie (2013)).
Households have assets a. These assets can be allocated to
(frictionless) houses and/or to financial assets with a collateral
constraint. The poor will have some housing wealth and a mortgage,
the rich houses and shares of the economy’s mutual fund.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Production: two sectors tradables and nontradables.
Nontradables
Monopolistic firms, each one producing a different variety.
Each firm/variety has many locations, and each location has its own
production function. Labor can be partially reallocated to accommodate
demand differences across locations.
Firms post prices before the location is filled.
Tradables (standard).
Competitive.
(Large) Adjustment costs to both capital and labor.
Its output is used for exports, investment, and (part of) consumption.
Decreasing returns.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Goods markets
Search frictions in the markets for nontradables:
Households look for varieties.
Random search.
Richer people consume and search more.
Cuts in consumption cut search which cuts productivity.
Perfect competition and frictionless markets for tradables.
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Financial Frictions, Asset Prices, & the Great Recession
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Labor market
Workers are rationed.
Firms hire as many workers as they wish paying hiring costs. (like a
vacancy filling probability of 1, with hiring costs).
Employment: N = NN + NT .
Same job finding probability across types: Φe =
V
1−N .
Wages are determined via the following formula
logw − logw = εw logY − logY
It simplifies things.
Gornemann, Kuester, and Nakajima (2012).
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Financial Frictions, Asset Prices, & the Great Recession
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Assets markets: Financial assets and houses
Total housing H is in fixed supply.
Negative financial assets (b0 < 0) are (undefaultable) mortgages.
Its interest rate
1
q
is predetermined at borrowing time,
(
0
q(θ, b ) =
1,
1
1+r ∗
− ς(θ),
if b ≥ 0
if b < 0
Mortgages have to be collateralized by housing
q(θ, b) b ≥ −λ(θ) ph (S) h
Positive financial assets (b > 0) are shares of a mutual fund.
Its return is stochastic. Possible capital gains and loses.
The return is
(
0
R(S, S , b) =
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
1 + r(S, S 0 ),
1,
if b ≥ 0
if b < 0.
Financial Frictions, Asset Prices, & the Great Recession
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State variables
A household is characterized by {, e, a}.
Let X denote the measure over types x = {, e, a}.
The vector of aggregate state variables is
S = {θ, B, KN , KT , NN , NT , X}
Here B is the net foreign asset position. K and N are predetermined
factor inputs.
Hence either we do Krusell-Smith or the transition after an unforeseen
shock. Today, we do the latter.
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Financial Frictions, Asset Prices, & the Great Recession
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Households’ problem
V (S, , e, a) =
max
X
cN,i ,cT ,IN ,h,d
β
u(cA , h, d)+
0
ε
0 0 0 0
0
Πθθ,θ0 Πw
e0 |e, (S ) Π,0 V [S , , e , a (S , b, h)]
0 ,e0 ,θ 0
subject to
Z IN
pi (S)cN,i + cT + ph (S)h + q(θ, b)b = a + 1e=1 w(S) + 1e=0 w
BC
0
a0 (S 0 , b, h) = ph (S 0 )h + R(S, S 0 , b)b
q(θ, b)b ≥ −λ(θ)ph (S)h
FC
IN = d Ψd [Qg (S)]
SC
S 0 = G(S, θ0 )
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AA
Financial Frictions, Asset Prices, & the Great Recession
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RE
15/52
Nontradable firms’ problem
At each location, the production function is
1 α2
F N (k, `1 , `2 ) = zN k α0 `α
1 `2
k and `1 are pre-installed. `2 is variable to meet different demands.
The demand function is given by c(pi , S, x) =
h
pi
p(S)
ρ
i 1−ρ
cN (S, x)
When a shopper wants to buy c units of goods at a location, the
amount of variable labor `2 needed to produce c is
1
f ` (c, k, `1 ) = c−1 zN k α0 `α
1
− α1
2
At the posted price pi , the total variable labor needed is
Z
d(x, S)
`2 ≥ Ψf [Qg (S)] f ` [c(pi , S, x), k, `1 ]
D(S)
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Nontradable firms’ problem
ΩN (S, k, n) = max Ψf [Qg (S)]pi
Z
i,v,pi
`1 ,`2
c(pi , S, , e, a) dx − w(S)` − i − κv
+
X
Πθθ,θ0
θ0
ΩN (S 0 , k 0 , n0 )
1 + r∗
subject to
f
g
Z
`2 ≥ Ψ [Q (S)]
f ` [c(pi , S, x), k, `1 ]
d(x, S)
D(S)
`1 + `2 = n (S)
k 0 = (1 − δk )k + i − φN (k, i)
0
n = [1 − δ n (S)]n + v
0
0
S = G(S, θ )
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DC
SL
LMK
LML
RE
Financial Frictions, Asset Prices, & the Great Recession
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Tradable firms’ problem
ΩT (S, k, n) = max F T (k, `) − w(S)` − i − κv − φT,n (n0 , n)
i,v
+
X
Πθθ,θ0
θ0
ΩT (S 0 , k 0 , n0 )
1 + r∗
subject to
k 0 = (1 − δk )k + i − φT,k (k, i)
` = n (S)
n0 = [1 − δ n (S)]n + v
S 0 = G(S).
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Financial Frictions, Asset Prices, & the Great Recession
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Mutual fund
Financial wealth in the economy is
Z
L+ =
b(S, , e, a) dx
b>0
Mortgages in the economy are
Z
L− =
−b(S, , e, a) dx
b<0
Net foreign asset position of the country (the mutual fund owns all
firms)
1
N
N
T
T
B = L+ − Ω (S) − π (S) + Ω (S) − π (S) +
L−
1 + r∗
The realized rate of return is
1 + r(S, S 0 ) =
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
ΩN (S 0 ) + ΩT (S 0 ) + (1 + r∗ )B + L−
L+
Financial Frictions, Asset Prices, & the Great Recession
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Equilibrium
An equilibrium is a set of decision rules and values for households, firms’
values and decision rules, and a set aggregate variables of aggregate
states, such that:
Households’ and firms’ policy functions and value functions solve the
corresponding program problems.
Aggregate searching consistence
Z
D(S) = d(S, , e, a) dx,
Nontradable prices satisfies
p(S) = pi (S, KN , NN ) dx,
Housing market clears
Z
h(S, , e, a) dx = H.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Equilibrium
Average separation probability and labor force quality
P
P
n()
δn ()n()
δ n (S) =
,
(S) = N
N
Rate of return to the mutual fund satisfies
ΩN (S 0 ) + ΩT (S 0 ) + (1 + r∗ )B +
R
1 + r(S, S ) =
b(S, x)
b>0
0
R
b<0
b(S, x)
Wage satisfies
logw(S) − logw = εw logY (S) − logY
The law of motion G(S) is consistent with households’ decisions and
employment dynamics.
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Financial Frictions, Asset Prices, & the Great Recession
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Mapping the Model to Data
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Functional forms
Preferences
1
u(cA , h, d) =
1 − σc
1−σc
d1+γ
cA − ξd
+ v(h)
1+γ
where there is an Armington aggregator for consumption
η
η−1
η−1
η−1
ρ
η
η
cA = ω (cN IN )
+ (1 − ω)cT
and houses are inferior goods as a proxy for segmentation of housing
markets
(
v(h) =
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
ξh
1
1−σh
ξh
2
1−σh
(h + h1 )
(h + h2 )
1
1−σh
2
1−σh
,
,
if h < b
h
if h ≥ b
h.
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−0.1
3.5
−0.15
3
−0.2
Housing
2.5
−0.25
2
−0.3
1.5
−0.35
1
−0.4
−0.45
−0.5
1
Consumption
0.5
Housing function with less curvature
Housing function with more curvature
2
3
4
Housing utility function
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
5
0
0
0.5
1
1.5
2
Engel Curve: consumption vs housing
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Functional forms
Production function
α2
1
F N (k, `1 , `2 ) = zN k α0 `α
1 `2 ,
F T (k, `) = zT k θ0 `θ1
Capital adjustment cost in the nontradable goods sector
εN
φ (i, k) =
2
N
i
− δk
k
2
k
Capital and employment adjustment cost in the tradable goods sector
φ
T,k
εT,k
(i, k) =
2
i
− δk
k
2
k,
φ
T,n
εT,n
(n , n) =
2
0
2
n0
−1 n
n
Matching technology
M (D, T ) = νDµ T 1−µ
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Financial Frictions, Asset Prices, & the Great Recession
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Exogenously determined parameters
A period is half a quarter.
Parameter
Risk aversion for consumption, σc
Value
2.0
1
Risk aversion for housing, σh
2.0
2
Risk aversion for housing, σh
10.0
Curvature of shopping, γ
1.5
Elasticity of substitution bw tradables and nontradables, η
0.80
Cutoff value for housing utility, b
h
1.4
Price markup, ρ
1.1
Loan to value ratio, λ
0.75
Interest rate for international bonds, r ∗
4%
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Endogenously determined parameters: aggregate
Target
Wealth to output ratio
Value
4.70
Housing value to output ratio
1.67
ξh
0.95
Debt to output ratio
0.75
4
30.77
Share of tradables
0.30
ω
0.95
Occupancy Rate
0.81
ν
0.81
Capital to output ratio
2.00
δk
0.01
Labor Share in nontradables
0.64
α0
0.27
α1 = α2
——
α1
0.36
Labor Share in tradables
0.66
θ1
0.66
1.4θ0 + θ1 = 1
——
θ0
0.23
Vacancy cost to output ratio
0.02
κ
0.42
Home production to lowest earning ratio
0.50
w
0.07
Units Parameters
1
Output
Parameter
β
Value
0.98
zN
0.93
Relative price of nontradables
1
zT
0.48
Market tightness in goods markets
1
ξd
0.03
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Endogenously determined parameters: cross-section
Target
Value
Parameter
Value
Job duration for type 1
1.5 year
1
δn
0.083
Job duration for type 3
5 year
3
δn
0.025
Job duration for type 4
5 year
4
δn
0.025
Unemployment rate
6%
2
δn
0.048
Wealth Gini index
0.82
Π1,4
0.0007
Earnings Gini index
0.64
Π4,1
0.0156
Earning autocorrelation
0.91
Π1,1
0.9660
Earning stdev
0.20
Π2,2
0.9774
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Financial Frictions, Asset Prices, & the Great Recession
Lorenz
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Lorenz Curve
Return
Data
Model
1
1
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
0
−0.2
0
−0.2
0.2
0.4
0.6
0.8
1
0
0.2
0.4
0.6
0.8
1
Net worth
Housing asset
Financial asset
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Financial Frictions, Asset Prices, & the Great Recession
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Experiments: once and for all set of surprises in the
environment
1
Over the next 4.5 months the down payment changes from 25% to
27.5% to 30% to 32.5% (to avoid having households with empty
choice set).
2
The borrowing interest rate’s surcharge goes from zero to .3%.
3
Both at the same time.
4
The inverse process. Credit expansion.
• All of these with fixed and flexible wages.
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Financial Frictions, Asset Prices, & the Great Recession
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Long Run Properties
• Typically like in all Aiyagari (1994) - Bewley (1986) - Huggett (1993)
- Imrohoroğlu (1989) type models, in the long run output and wealth end
up being higher.
• But in our economies the transition is associated to a recession.
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Financial Frictions, Asset Prices, & the Great Recession
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Experiment : gradual worsening of both λ and borrowing cost
1
12
0
11
10
−1
9
−2
8
−3
7
−4
−5
0
6
1
2
3
4
5
6
7
8
9
5
0
10
1
2
Real output
3
4
5
6
7
8
9
10
9
10
Unemployment
0
5
−1
0
−2
−5
−10
−3
−15
−4
−20
−5
−25
−6
−30
−7
−8
0
−35
1
2
3
4
5
6
7
8
9
10
−40
0
Consumption
Flexible wage
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1
2
3
4
5
6
7
8
Investment
Fixed wage
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Experiment: gradual worsening of both λ and borrowing cost
0
0
−1
−5
−2
−10
−3
−4
−15
−5
−20
−6
−7
0
1
2
3
4
5
6
7
8
9
10
−25
0
1
2
3
4
5
6
7
8
9
10
Debt
Wealth
0
−5
−10
−15
−20
0
1
2
3
4
5
6
7
8
9
10
Housing price
Flexible wage
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Fixed wage
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Experiment: gradual worsening of both λ and borrowing cost
0.5
2
1.5
0
1
−0.5
0.5
−1
−0.5
0
−1
−1.5
−1.5
−2
0
1
2
3
4
5
6
7
8
9
−2
0
10
1
TFP with total hours
2
3
4
5
6
7
8
9
10
9
10
Labor Productivity
2.5
0.5
2
0
1.5
−0.5
1
−1
0.5
−1.5
0
−0.5
0
1
2
3
4
5
6
7
8
9
10
Labor quality
Flexible wage
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−2
0
1
2
3
4
5
6
7
8
TFP with total labor inputs
Fixed wage
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Experiment: gradual improvement of λ from 0.75 to 0.825
6.4
1.2
6.2
1
6
0.8
5.8
0.6
5.6
0.4
5.4
0.2
5.2
0
−0.2
0
5
1
2
3
4
5
6
7
8
9
10
0
1
2
Real output
3
4
5
6
7
8
9
10
9
10
Unemployment
14
2.5
12
2
10
1.5
8
6
1
4
0.5
2
0
0
−0.5
0
1
2
3
4
5
6
7
8
9
10
−2
0
Consumption
Flexible wage
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1
2
3
4
5
6
7
8
Investment
Fixed wage
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Experiment: gradual improvement of λ from 0.75 to 0.825
3
12
2.5
10
2
8
1.5
6
1
4
0.5
2
0
−0.5
0
1
2
3
4
5
6
7
8
9
0
0
10
1
2
3
4
Wealth
5
6
7
8
9
10
Debt
9
8
7
6
5
4
3
2
1
0
0
1
2
3
4
5
6
7
8
9
10
Housing price
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Fixed wage
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Experiment: gradual improvement of λ from 0.75 to 0.825
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0
0
−0.1
0
1
2
3
4
5
6
7
8
9
10
−0.1
0
1
TFP with total hours
2
3
4
5
6
7
8
9
10
9
10
Labor Productivity
0.1
0.6
0.5
0
0.4
−0.1
0.3
0.2
−0.2
0.1
−0.3
0
−0.4
0
1
2
3
4
5
6
7
8
9
10
−0.1
0
Labor quality
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
1
2
3
4
5
6
7
8
TFP with total labor inputs
Fixed wage
Financial Frictions, Asset Prices, & the Great Recession
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Experiment 5: More flexible wage schedule
0.5
9
0
8.5
−0.5
8
−1
7.5
−1.5
7
−2
6.5
−2.5
6
−3
0
1
2
3
4
5
6
7
8
9
10
5.5
0
1
2
Real output
1
4
5
6
7
8
9
10
9
10
5
0
0
−1
−5
−2
−10
−3
−15
−4
−20
−5
0
3
Unemployment
1
2
3
4
5
6
7
8
9
10
−25
0
Consumption
Flexible wage w = 0.45
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
1
2
3
4
5
6
7
8
Investment
Flexible wage w = 1
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Experiment 5: More flexible wage schedule
1
0
0
−2
−1
−4
−2
−6
−3
−8
−4
−10
−5
0
1
2
3
4
5
6
7
8
9
10
−12
0
1
2
3
4
5
6
7
8
9
10
Debt
Wealth
0
−2
−4
−6
−8
−10
−12
−14
0
1
2
3
4
5
6
7
8
9
10
Housing price
Flexible wage w = 0.45
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Flexible wage w = 1
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Experiment 5: More flexible wage schedule
0.4
0.5
0.2
0
0
−0.2
−0.4
−0.5
−0.6
−0.8
−1
0
1
2
3
4
5
6
7
8
9
10
−1
0
1
TFP with total hours
1.2
3
4
5
6
7
8
9
10
9
10
0.2
1
0
0.8
−0.2
0.6
−0.4
0.4
−0.6
0.2
−0.8
0
−0.2
0
2
Labor Productivity
−1
1
2
3
4
5
6
7
Labor quality
8
9
10
−1.2
0
Flexible wage w = 0.45
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
1
2
3
4
5
6
7
8
TFP with total labor inputs
Flexible wage w = 1
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Conclusions
We have a recession generated purely by increased difficulties to
borrow on the part of households
The recession comes together with
TFP loses
Drop in Housing prices (movements too sharp because of lack of house
frictions)
Drop in Stock Market
The literature is trying hard to get this
with limited success.
(Midrigan and Philippon (2011), Guerrieri
and Lorenzoni (2009))
Still ways to go:
Foreclosures; slow housing frictions; Long term Mortgages.
Slow expanding export industries.
Model of banking cycles.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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References
Aiyagari, S. Rao. 1994. “Uninsured Idiosyncratic Risk and Aggregate Saving.” Quarterly Journal of Economics 109:659–684.
Bewley, Truman. 1986. “Stationary Monetary Equilibrium with a Continuum of Independently Fluctuating Consumers.” In Contributions
to Mathematical Economics in Honor of Gérard Debreu, edited by Werner Hildenbrand and Andreu Mas-Colell. Amsterdam: North
Holland.
Fang, Lei and Jun Nie. 2013. “Education, Human Capital and U.S. Labor Market Dynamics.” Presented at MidWest Macro Meetings.
Gornemann, Nils, Keith Kuester, and Makoto Nakajima. 2012. “Monetary Policy with Heterogeneous Agents.” Mimeo, FRB Philadelphia.
Guerrieri, Veronica and Guido Lorenzoni. 2009. “Liquidity and Trading Dynamics.” Econometrica 77 (6):1751–1790.
Huggett, Mark. 1993. “The Risk-Free Rate in Heterogeneous-Agent, Incomplete-Insurance Economies.” Journal of Economic Dynamics
and Control 17:953–970.
Huo, Zhen and José-Vı́ctor Rı́os-Rull. 2013a. “Balance Sheet Recessions.” Working Paper, Federal Reserve Bank of Minneapolis.
———. 2013b. “Paradox of Thrift Recessions.” Working Paper, Federal Reserve Bank of Minneapolis.
Imrohoroğlu, A. 1989. “Cost of Business Cycles with Indivisibilities and Liquidity Constraints.” Journal of Political Economy 97:1364–1383.
Midrigan, V. and T. Philippon. 2011. “Household Leverage and the Recession.” Working Paper FIN-11-038, New York University.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Facts on the last recession: IV
0.21
Return
0.65
0.2
0.6
0.19
0.55
0.18
0.17
0.5
0.16
0.45
0.15
2004
2006
2008
2010
Debt to wealth
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
2012
0.4
2004
2006
2008
2010
2012
Debt to housing value
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Facts: Continued
Return
110
100
90
80
70
60
50
40
1980
1985
1990
1995
2000
2005
2010
Real output
120
120
100
100
80
80
60
60
40
40
20
20
0
1980
1985
1990
1995
2000
Consumption
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
2005
2010
0
1980
1985
1990
1995
2000
2005
2010
Investment
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Facts: Continued
Return
100
110
95
100
90
90
85
80
80
75
70
70
60
65
60
1980
1985
1990
1995
2000
2005
2010
50
1980
TFP with total hours
1985
1990
1995
2000
2005
2010
Labor productivity
104
105
102
100
100
95
98
90
96
85
94
80
92
75
90
70
88
86
1980
1985
1990
1995
2000
Labor quality
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
2005
2010
65
1980
1985
1990
1995
2000
2005
2010
TFP with total labor inputs
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Facts: Continued
‘Real output’, ‘consumption’ and ‘investment’ are ‘Gross Domestic
Product’, ‘Personal Consumption Expenditures’ and ‘Gross Private
Domestic Investment’ from BEA.
‘TFP with total hours’ is calculated by Fernald (2012).
‘Labor productivity’ is total output divided by total hours.
‘Labor quality’ follows Aaronson and Sullivan (2001), which are
extended by Bart Hobijn and Joyce Kwok (FRBSF).
‘TFP with total labor inputs’ is total output divided by the product of
total hours and labor quality.
These variables shown at the beginning are deviations from their linear
trends. These variables shown in the appendix have their values in
2007 q4 normalized to 100.
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Financial Frictions, Asset Prices, & the Great Recession
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Experiment 1: gradual change of λ from 0.75 to 0.675
+
10
0.5
9.5
0
9
−0.5
8.5
−1
8
−1.5
7.5
7
−2
6.5
−2.5
6
−3
0
1
2
3
4
5
6
7
8
9
10
5.5
0
1
2
Real output
5
0
0
−1
−5
−2
−10
−3
−15
−4
−20
1
2
3
4
5
6
7
8
9
10
−25
0
Consumption
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
4
5
6
7
8
9
10
9
10
Unemployment
1
−5
0
3
1
2
3
4
5
6
7
8
Investment
Fixed wage
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Experiment 1: gradual change of λ from 0.75 to 0.675
1
0
0
−2
−1
−4
−2
−6
−3
−8
−4
−10
−5
0
1
2
3
4
5
6
7
8
9
10
−12
0
1
2
3
4
5
6
7
8
9
10
Debt
Wealth
0
−2
−4
−6
−8
−10
−12
−14
0
1
2
3
4
5
6
7
8
9
10
Housing price
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Fixed wage
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Experiment 1: gradual change of λ from 0.75 to 0.675
0.2
1
0
0.5
−0.2
0
−0.4
−0.6
−0.5
−0.8
−1
−1
−1.2
0
1
2
3
4
5
6
7
8
9
10
−1.5
0
1
TFP with total hours
1.4
3
4
5
6
7
8
9
10
9
10
0.2
1.2
0
1
−0.2
0.8
−0.4
0.6
−0.6
0.4
−0.8
0.2
−1
0
−1.2
−0.2
0
2
Labor Productivity
1
2
3
4
5
6
7
8
9
10
−1.4
0
Labor quality
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
1
2
3
4
5
6
7
8
TFP with total labor inputs
Fixed wage
Financial Frictions, Asset Prices, & the Great Recession
10th Csef- Igier Symposium
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Experiment 2: gradual change of borrowing cost from 0 to
0.3%
8.5
0
8
−0.5
7.5
7
−1
6.5
−1.5
6
−2
0
1
2
3
4
5
6
7
8
9
10
5.5
0
1
2
Real output
3
4
5
6
7
8
9
10
9
10
Unemployment
2
0
0
−0.5
−2
−4
−1
−6
−1.5
−8
−2
−10
−12
−2.5
−14
−3
0
1
2
3
4
5
6
7
8
9
10
−16
0
Consumption
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
1
2
3
4
5
6
7
8
Investment
Fixed wage
Financial Frictions, Asset Prices, & the Great Recession
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Experiment 2: gradual change of borrowing cost from 0 to
0.3%
0
0
−0.5
−1
−1
−2
−1.5
−3
−2
−4
−2.5
−3
0
−5
1
2
3
4
5
6
7
8
9
−6
0
10
1
2
3
4
Wealth
5
6
7
8
9
10
Debt
0
−1
−2
−3
−4
−5
−6
−7
−8
0
1
2
3
4
5
6
7
8
9
10
Housing price
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
Fixed wage
Financial Frictions, Asset Prices, & the Great Recession
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Experiment 2: gradual change of borrowing cost from 0 to
0.3%
0.2
0.8
0.1
0.6
0
0.4
−0.1
0.2
−0.2
0
−0.3
−0.2
−0.4
−0.4
−0.5
0
1
2
3
4
5
6
7
8
9
10
−0.6
0
1
TFP with total hours
2
3
4
5
6
7
8
9
10
9
10
Labor Productivity
0.9
0
0.8
−0.1
0.7
−0.2
0.6
0.5
−0.3
0.4
−0.4
0.3
−0.5
0.2
−0.6
0.1
0
0
1
2
3
4
5
6
7
8
9
10
−0.7
0
Labor quality
Flexible wage
Huo & Rı́os-Rull, UMN, Mpls Fed, CAERP
1
2
3
4
5
6
7
8
TFP with total labor inputs
Fixed wage
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