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Financial frictions on capital allocation: A transmission mechanism of TFP fluctuations

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  • Chen, Kaiji
  • Song, Zheng

Abstract

This paper provides a theory of financial frictions as a transmission mechanism for news shocks to drive aggregate TFP fluctuations. We show that in an economy calibrated to U.S. data, variations in financial frictions on capital allocation in response to news about future technology can generate aggregate TFP fluctuations and, thus, trigger business cycles before the actual technological change is realized. Using the COMPUSTAT dataset, we find that the relative capital productivity of financially constrained to unconstrained firms is highly countercyclical. Moreover, our VAR analysis shows that news shocks can account for a substantial fraction of the relative capital productivity fluctuations over business cycle frequencies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 6 ()
Pages: 683-703

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Handle: RePEc:eee:moneco:v:60:y:2013:i:6:p:683-703

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Financial Friction; Capital Allocation; TFP Fluctuation; News Shock;

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Cited by:
  1. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
  2. Enrique Mendoza & Javier Bianchi, 2010. "Overborrowing, financial crises and ‘macro-prudential’ taxes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
  3. Javier Bianchi & Enrique G. Mendoza, 2011. "Overborrowing, Financial Crises and 'Macro-prudential' Policy," 2011 Meeting Papers 175, Society for Economic Dynamics.
  4. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-254.
  5. Lei Fang, 2010. "Entry cost, financial friction, and cross-country differences in income and TFP," Working Paper 2010-16, Federal Reserve Bank of Atlanta.
  6. Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers 9624, C.E.P.R. Discussion Papers.
  7. Jennifer La'O, 2010. "Collateral Constraints and Noisy Fluctuations," 2010 Meeting Papers 780, Society for Economic Dynamics.
  8. Enrique G. Mendoza & Javier Bianchi, 2011. "Overborrowing, Financial Crises and ‘Macro-Prudential’ Policy?," IMF Working Papers 11/24, International Monetary Fund.
  9. Christoph Görtz & John D. Tsoukalas, 2013. "Sector Specific News Shocks in Aggregate and Sectoral Fluctuations," CESifo Working Paper Series 4269, CESifo Group Munich.
  10. Lei Fang, 2010. "Entry Barriers, Financial Frictions, and Cross-Country Differences in Income and TFP," 2010 Meeting Papers 505, Society for Economic Dynamics.

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