How do financial frictions affect the response of an economy to aggregate shocks? In this paper, we address this … liquid assets to smooth individual income shocks. We show that the response of this economy to aggregate shocks depends on … reserves and the response of the economy tends to be larger. In this case, agents expect to be liquidity constrained and, due …

How do financial frictions affect the response of an economy to aggregate shocks? In this paper, we address this … liquid assets to smooth individual income shocks. We show that the response of this economy to aggregate shocks depends on … reserves and the response of the economy tends to be larger. In this case, agents expect to be liquidity constrained and, due …

hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit …

economy's fundamentals. I ask whether monetary policy can offset the effect of these shocks and whether this offsetting is … two shocks when they hit the economy. The main results are: (1) despite the lack of superior information an appropriate … monetary policy rule can change the economy's response to the two shocks; (2) monetary policy can achieve full aggregate …