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Piotr Żoch, Ph.D.

University of Warsaw, Poland

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Authors: Piotr Zoch, Yu-Ting Chiang

Abstract: We derive sufficient statistics that describe how the financial sector transmits macroeconomic policies to aggregate demand. Our framework nests models of financial intermediation with various microfoundations and generates crucial aspects of aggregate demand with household heterogeneity. The financial sector supplies liquidity by issuing liquid assets to finance illiquid capital. The elasticities of liquidity supply with respect to returns are sufficient statistics that describe how the financial sector affects aggregate responses to policies. We measure the elasticities with data on price and quantity, sidestepping the difficulty of measuring microfoundations of financial frictions. Quantitatively, these elasticities are central to the debate over the effectiveness of policies targeting the financial sector versus households. In common models analyzing these policies, output responses differ by orders of magnitude due to implicit assumptions about these elasticities. Estimates of the elasticities for the U.S. imply a stronger effect of targeting households than the financial sector.

JEL Classification: E2, E6, H3, H6
Keywords: financial frictions, liquidity, HANK, monetary and fiscal policy

Full Text: Financial Intermediation and Aggregate Demand: A Sufficient Statistics Approach