This research is a part of the project entitled: Understanding Inflation Dynamics of the Japanese Economy, funded by …

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 …