Financial shocks, comovement and credit frictions

- Financial shocks can generate comovement between macro variables and asset prices.
- The quantitative implications of different borrowing constraints are evaluated.
- The interaction between financial frictions and labor demand is key to the result.

In models with frictional financial markets, the specification of the borrowing constraint is crucial to generating comovement between macro variables and asset prices after credit shocks. The interaction between financial frictions and labor demand is key to the results.