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  5. Financial Frictions: Micro vs Macro Volatility

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Financial Frictions: Micro vs Macro Volatility

  • Renato Faccini
  • Seungcheol Lee
  • Ralph Luetticke
  • Morten O. Ravn
  • Tobias Renkin
American Economic Review (Forthcoming)

Abstract

We argue that consumer credit spreads matter for household choices and that time-varying spreads have important distributional consequences. Studying Danish household data, we show that consumer credit spreads have heterogeneous impact on asset dynamics and consumption choices across the wealth distribution, and that time-varying spreads induce a countercyclical marginal propensity to consume. We study a HANK-model where banks provide consumer credit and corporate loans. Through countercyclical credit spreads, frictional finance amplifies aggregate shocks and induces consumption inequality. Economies with less leveraged banks experience reduced aggregate volatility, but may face higher volatility and lower welfare at the household level.

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