In sum, we find that an unanticipated tightening in borrowing conditions on its own can generate a large recession that is far more persistent than the financial shock itself. Because it causes long-lived disruption in the distribution of capital, and thus production, an episode of tight credit...

An important insight of our analysis is that changes in the persistence and variability of idiosyncratic order costs and productivities alter the distribution of firms over inventory levels. This, in turn, affects the extent and speed of firms' responses to aggregate shocks, and thus the model's...