Navigation auf zora.uzh.ch

Search ZORA

ZORA (Zurich Open Repository and Archive)

Migration von ZORA auf die Software DSpace

ZORA will change to a new software on 8th September 2025. Please note: deadline for new submissions is 21th July 2025!

Information & dates for training courses can be found here: Information on Software Migration.

A Simple Macroeconomic Model with Extreme Financial Frictions

Klimenko, Nataliya; Pfeil, Sebastian; Rochet, Jean-Charles (2017). A Simple Macroeconomic Model with Extreme Financial Frictions. Journal of Mathematical Economics, 68:92-102.

Abstract

We develop a simple macroeconomic model with extreme financial frictions (no credit markets) and show that poverty traps can emerge even in the absence of leverage. In our model, farmers produce fruit by renting land from landlords. Crops are exposed to aggregate shocks (weather risk). To guarantee themselves a positive consumption level even after a bad crop, farmers store fruit as precautionary savings and adjust their scale of activity to the level of these savings. The land that is not rented to farmers is cultivated by landlords, who are less productive. We show that there is a unique Markov competitive equilibrium, in which the rental price of land increases with the level of farmers’ savings. A decline in savings, caused by a bad crop, may bring the economy into a ”poverty trap”, even in the absence of any leverage. Fluctuations of output are caused by productivity shocks and amplified by fluctuations in the level of activity of farmers. The simplicity of our model allows us to study analytically why the long run behavior of the economy may differ markedly from the one predicted by the steady state paradigm. Specifically, we show that when the risk-adjusted productivity of farmers is high and the elasticity of the land supply is low, using the steady state paradigm leads to serious mis-estimations of the long run average state of the economy.

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Economics and Econometrics
Physical Sciences > Applied Mathematics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:January 2017
Deposited On:22 Nov 2017 14:25
Last Modified:16 Jun 2025 01:39
Publisher:Elsevier
ISSN:0304-4068
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jmateco.2016.04.002
Related URLs:http://www.sciencedirect.com/science/article/pii/S0304406816300106 (Publisher)
Other Identification Number:merlin-id:13299
Full text not available from this repository.

Metadata Export

Statistics

Citations

Dimensions.ai Metrics
6 citations in Web of Science®
5 citations in Scopus®
Google Scholar™

Altmetrics

Authors, Affiliations, Collaborations

Similar Publications