productivity. However, when nancial frictions are introduced, a non-linearity in the saving function arises. Highly productive agents (green dashed line) cannot operate the technology when poor and have to select into the labor market. After saving some funds, they are able to run a rm but under nancing constraints. For this reason,they will start saving even more as they increase the scale of production, generating the increasing part of the saving policy function. At some level of wealth, agents running a rm reach their optimal level of production and the return to an extra unit of saving is equal to the prevailing interest rate in the market. After that point, consumption is more important than saving and the policy function starts decreasing. Notice that the non-linearity does not emerge for low productivity agents. Independently of the level of wealth, these agents are not productive enough to run a rm that generates prots higher than the current market wage.

# 6.2 Dynamics

In this section I examine the response of the model economy to an aggregate nancial shock modeled as a tightening of the credit conditions in the economy. The evolution of the credit conditions are determined by the path of _λ_ , which I have calibrated in (5.4). After the initial shock, credit conditions in the economy recover slowly to the steady state value. In subsection (6.2.1) I study the behavior of the model in comparison with the data for the full model. Section (6.2.2) evaluates the role of lobbying to explain the dynamics of TFP and output for the non-nancial corporate sector. In particular, I show that lobbying amplies the aggregate eects generated due to the nancial frictions when facing a nancial shock. Finally, in subsection (6.2.3) I test whether the calibrated model can generate the patterns described in (3).

## 6.2.1 Benchmark Economy

Figure (11) displays the evolution of aggregate output, measured productivity (TFP), investment rate and lobbying expenditure for the data and the simulated economy. The data for output and TFP have been detrended using a Hodrick-Prescott lter with a quarterly frequency. For lobbying expenditure, the data has been detrended using a linear trend. In the case of output, TFP and lobbying expenditure, the impulse responses from the model are deviations from steady state. For the data, the gure shows dierences with respect to the value of each series in the fourth quarter of 2007. In the case of the investment rate, the gure shows dierences with respect to the steady state for the model, and the dierence with respect to the fourth quarter of 2007 for the U.S. data.<sup>49</sup> The blue line in each panel represents the full model with nancial frictions, tax benets, and lobbying. The model generates GDP dynamics close to the one observed in the data, explaining most of the decline in output. The credit crunch in the model generates a reduction in output of almost 80 % of the decline observed in the data between 2007 and 2009. By the end of 2009, the model predicts a fall of 5.9 % of GDP relative to the steady state. For the same period of time the data showed a decline of 7.5 % .

> 49Appendix C.7 explains in detail the data used for the construction of each variable.

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