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Frictional capital reallocation I: Ex ante heterogeneity

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  • Wright, Randall
  • Xiao, Sylvia Xiaolin
  • Zhu, Yu

Abstract

We study dynamic general equilibrium models where capital is traded in frictional markets featuring liquidity considerations. Gains from trade arise from ex ante heterogeneity: some firms are better at investment, so they build capital in the primary market, while others acquire it in the secondary market. We consider specifications with random search and bargaining, as well as those with directed search and posting, and provide strong results for both on existence, uniqueness, efficiency and comparative statics. Monetary and fiscal policy are discussed in detail. Among other advantages, the framework is tractable enough to analyze using simple diagrams.

Suggested Citation

  • Wright, Randall & Xiao, Sylvia Xiaolin & Zhu, Yu, 2018. "Frictional capital reallocation I: Ex ante heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 100-116.
    • Handle: RePEc:eee:dyncon:v:89:y:2018:i:c:p:100-116
    DOI: 10.1016/j.jedc.2018.01.003
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    Cited by:

    1. Dong, Feng & Wang, Pengfei & Wen, Yi, 2020. "A search-based neoclassical model of capital reallocation," European Economic Review, Elsevier, vol. 128(C).
    2. Feng Dong, 2023. "Aggregate Implications of Financial Frictions for Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 45-71, April.
    3. Altermatt, Lukas & Iwasaki, Kohei & Wright, Randall, 2021. "Asset pricing in monetary economies," Journal of International Money and Finance, Elsevier, vol. 115(C).
    4. Wei Cui & Randall Wright & Yu Zhu, 2022. "Endogenous Liquidity and Capital Reallocation," Staff Working Papers 22-27, Bank of Canada.
    5. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    6. Lukas Altermatt & Christian Wipf, 2020. "Liquidity, the Mundell-Tobin Effect, and the Friedman Rule," Diskussionsschriften dp2013, Universitaet Bern, Departement Volkswirtschaft.
    7. Baughman, Garth & Rabinovich, Stanislav, 2021. "Capacity choice, monetary trade, and the cost of inflation," European Economic Review, Elsevier, vol. 134(C).
    8. Randall Wright & Sylvia Xiao & Yu Zhu, 2020. "Frictional Capital Reallocation with Ex Post Heterogeneity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 227-253, August.
    9. Gomis-Porqueras, Pedro & Huangfu, Stella & Sun, Hongfei, 2020. "The role of search frictions in the long-run relationships between inflation, unemployment and capital," European Economic Review, Elsevier, vol. 123(C).
    10. Cun, Wukuang, 2022. "Endogenous lemons markets and information cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).

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    More about this item

    Keywords

    Capital reallocation; Investment; Liquidity; Monetary and fiscal policy;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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