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Borrowing Constraints and Aggregate Economic Activity
Jose A. Scheinkman
Laurence Weiss
Abstract
A model of aggregate economic activity is formulated which emphasizes the effects of borrowing constraints in the presence of uninsurable risk. An important determinant of current income level is shown to be the cross-sectional distribution of wealth. As this distribution evolves endogenously, the model is capable of producing rich dynamics from a simple specification of exogenous shocks. The model shows that this phenomena can contribute to observed asset price volatility.
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