Aggregate Effects of Collateral Constraints

Abstract:

We structurally estimate a dynamic model with heterogeneous firms and collateral constraints. Embedding this model in a general equilibrium framework allows us to quantify the impact of financing frictions on aggregate output and welfare. The structural estimation is based on the causal effect of collateral shocks on firm level corporate investment in the United States. The estimates imply that lifting financing frictions would increase welfare by 9.4% and aggregate output by 11%. Half of this aggregate output gain is due to an increase in the aggregate stock of capital, one quarter is due to a larger aggregate labor supply, while the remaining quarter is due to a higher aggregate productivity from a better allocation of inputs across heterogeneous firms.