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Search Frictions in Physical Capital Markets as a Propagation Mechanism

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  • André Kurmann
  • Nicolas Petrosky-Nadeau

Abstract

We build a Dynamic General Equilibrium model with search frictions for the allocation of physical capital and investigate its implications for the business cycle. While the model is in principle capable of generating substantial internal propagation to small exogenous shocks, the quantitative effects are modest once we calibrate the model to fit firm-level capital flows. We then extend the model with credit market frictions that lead to countercyclical default and countercyclical risk premia as in the data. Countercyclical default directly affects capital reallocation and has important general equilibrium income effects on labor supply. Yet, for calibrations in line with observed consumption dynamics, we find that even in this extended model, search frictions in physical capital markets play only a small role for business cycle fluctuations.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0712.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0712

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Keywords: Capital allocation frictions; search and matching; credit frictions; business cycles; dynamic general equilibrium;

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References

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Citations

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Cited by:
  1. Nicolas Petrosky-Nadeau, . "Endogenous Flows of Foreign Direct Investment and International Real Business Cycles," GSIA Working Papers 2011-E16, Carnegie Mellon University, Tepper School of Business.
  2. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2013. "Credit mismatch and breakdown," European Economic Review, Elsevier, vol. 59(C), pages 109-125.
  3. Nicolas Petrosky-Nadeau, 2007. "The Macroeconomic Dynamics of Labor and Capital Market Imperfections," 2007 Meeting Papers 477, Society for Economic Dynamics.
  4. Yong Kim, 2009. "Capital Reallocation and Liquidity with Search Frictions," 2009 Meeting Papers 72, Society for Economic Dynamics.
  5. Victor E. Li, 2012. "Monetary Transmission and the Search for Liquidity," Villanova School of Business Department of Economics and Statistics Working Paper Series 19, Villanova School of Business Department of Economics and Statistics.
  6. André Kurmann, 2009. "Holdups and Overinvestment in Physical Capital Markets," Cahiers de recherche 0904, CIRPEE.
  7. Sanjay K. Chugh & Andre Kurmann & David M. Arseneau, 2009. "Optimal Capital Taxation in an Economy with Capital Allocation Frictions," 2009 Meeting Papers 147, Society for Economic Dynamics.

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