Essays on Aggregate Productivity and the Collateral Constraint

We attempt to draw a straight line connecting financial shocks, portfolio reallocation by firms, and drop in aggregate productivity using a dynamic general equilibrium model. Our objective is to study whether the presence of financial frictions can produce business cycle-like response of variables to a financial shocks, as well as lower aggregate productivity. We propose a model that shows how an adverse shock to credit access for firms causes them to change the balance sheet portfolio composition of productive assets, which in turn causes loss of efficiency, and manifests as an efficiency wedge. We find some evidence for these dynamics in the data in the form of loss of measured TFP in countries after a financial shock, and a change in portfolio composition of assets for the U.S. data. Specifically, we find that post the 2008 crisis firms changed their allocation between assets of varying depreciation rates. We calibrate the model such that the impulse response functions are qualitatively similar to data facts. We take the canonical real business cycle model as base and modify it to incorporate our hypothesis stated above. We develop the simple model without frictions first and discuss its unique features, then add the friction and discuss how the full model responds to shocks and how the response of variables is very close to a business cycle. Then we address some technical issues in the model to make it comparable to a standard model with financial frictions. We also conduct welfare analysis and compute welfare costs by comparing a model of constrained firms with one of unconstrained firms