WP Global Economy 2014.04.01
This paper presents a simple heterogeneous agent economy model in order to show that the redistribution of wealth among heterogeneous agents can play a significant role in the propagation mechanism of financial crises. In an economy where firms with heterogeneous productivity operate under borrowing constraints, the redistribution of wealth reproduces hump-shaped responses for output and labor and procyclicality in observed productivity. In this model, a financial shock generates a persistent and hump-shaped response, whereas a productivity shock does not. It is also shown that the redistribution of wealth significantly amplifies the persistence and hump shape of output and labor in response to a financial shock. This model suggests that redistribution may thus be one of the key driving forces behind the transmission of financial crises.
Previous versions of this paper were circulated under the title "Heterogeneity and redistribution shocks in business cycles."