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Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism

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  • Andre Kurmann

    ()
    (Economics UQAM)

  • Nicolas Petrosky-Nadeau

Abstract

Empirical evidence suggests that capital separation is an important phenomenon over and beyond depreciation and that reallocation is a costly and time-consuming process. In addition, both separation and reallocation rates display substantial variation over the business cycle. We build a dynamic general equilibrium model where capital separation occurs endogenously because of credit constraints and capital (re)allocation is costly due to search frictions and capital specificity. Compared to the frictionless counterpart but also compared to models of financial frictions without costly capital reallocation, our model matches surprisingly well the persistence in U.S. output growth. Furthermore, our model implies that productive capital stocks vary more than reported in the data, which has the potential to substantially reduce the volatility of technology shocks inferred from the Solow residual

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 365.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:365

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Keywords: Credit Market Frictions; Capital Reallocation; Investment; Business Cycles; Output Growth Persistence;

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References

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Cited by:
  1. Nicolas Petrosky-Nadeau, . "Endogenous Flows of Foreign Direct Investment and International Real Business Cycles," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2011-E16, Carnegie Mellon University, Tepper School of Business.
  2. André Kurmann, 2009. "Holdups and Overinvestment in Physical Capital Markets," Cahiers de recherche 0904, CIRPEE.
  3. Victor E. Li, 2012. "Monetary Transmission and the Search for Liquidity," Villanova School of Business Department of Economics and Statistics Working Paper Series, Villanova School of Business Department of Economics and Statistics 19, Villanova School of Business Department of Economics and Statistics.
  4. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2013. "Credit mismatch and breakdown," European Economic Review, Elsevier, vol. 59(C), pages 109-125.
  5. Yong Kim, 2009. "Capital Reallocation and Liquidity with Search Frictions," 2009 Meeting Papers, Society for Economic Dynamics 72, Society for Economic Dynamics.
  6. Epstein, Brendan & Shapiro, Alan Finkelstein, 2014. "Employment and Firm Heterogeneity, Capital Allocation, and Countercyclical Labor Market Policies," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1115, Board of Governors of the Federal Reserve System (U.S.).
  7. Sanjay K. Chugh & Andre Kurmann & David M. Arseneau, 2009. "Optimal Capital Taxation in an Economy with Capital Allocation Frictions," 2009 Meeting Papers, Society for Economic Dynamics 147, Society for Economic Dynamics.
  8. Nicolas Petrosky-Nadeau, 2007. "The Macroeconomic Dynamics of Labor and Capital Market Imperfections," 2007 Meeting Papers, Society for Economic Dynamics 477, Society for Economic Dynamics.

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