From: A neoclassical perspective on Switzerland’s 1990s stagnation
1. | Aggregate shocks realize |
2. | Households and entrepreneurs rent capital and labour to firms. Firms produce consumption goods |
3. | Households and entrepreneurs receive wage and capital rental payments |
Households transfer income to entrepreneurs | |
4. | Households consume part of their income and store the remainder either via bank deposits or at home |
5. | Firms use their net worth to obtain loans from financial intermediaries to finance their capital creation projects |
6. | The idiosyncratic productivity shock \(\omega\) of each entrepreneur is realized. Entrepreneurs sell the newly created capital at price \(q_t\) and repay their loans, or, if \(\omega <{\bar{\omega }}_t\), default and are monitored by financial intermediaries |
7. | Households obtain lump-sum transfers \(\ddot{\Omega }_t\) and the gross return on deposits and buy capital goods. The non-defaulting entrepreneurs make their consumption-saving decisions |