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Ying Wang on Macro Effects of Micro Shocks with Credit Market Imperfections

Ying Wang
March 5, 2024
12:20 pm - 1:15 pm
Student Research Workshop

More from this series
Room 108

What is the macro effect of micro shocks when there are both input-output linkages, imposed by a production network, and a shadow credit linkage known as individuals’ credit condition, imposed by credit market imperfections, between individual entrepreneurs? To answer this question, I build a general but at the same time highly tractable dynamic multi-sector heterogeneous-agent framework featuring a general production network and two types of financial frictions that naturally arise from credit market imperfections, i) a collateral constraint on active entrepreneurs’ working capital, and ii) incomplete markets on individuals’ idiosyncratic shocks, to investigate the implication of credit market imperfections on the macro effects of micro shocks. I find that, due to credit market imperfections, a novel self-selection effect will arise changing the allocative efficiency characterized by Baqaee and Farhi (2020). And, importantly, the sector-level profit-over-revenue ratio serves as a non-parametric sufficient statistic to evaluate the magnitude of this novel self-selection effect. With this finding, I characterize the aggregation theorem of micro shocks to technology, wedge, and credit, to the first order, for disaggregated network economies with both goods-market distortions and credit-market imperfections.