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Financial frictions, depreciation, and capital return transmission

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  • Jalles, João Tovar

Abstract

We develop a macro-finance framework linking capital depreciation and financial frictions to the effective return on capital and the intertemporal allocation of saving and investment. Extending a discrete-time Ramsey model to allow for partial depreciation and financial wedges, we show that the responsiveness of saving and investment to capital intensity depends jointly on depreciation dynamics and intermediation efficiency. Using five-year panel data for 119 countries over 1970–2023, we find that higher effective depreciation significantly strengthens the sensitivity of investment to capital intensity, while financial development does not generate a uniform cross-country effect. These results suggest that the savings–capital relationship provides a tractable indicator of how depreciation and financial frictions shape the transmission of capital returns and the efficiency of aggregate capital allocation.

Suggested Citation

  • Jalles, João Tovar, 2026. "Financial frictions, depreciation, and capital return transmission," Finance Research Letters, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:finlet:v:101:y:2026:i:c:s1544612326005106
    DOI: 10.1016/j.frl.2026.109981
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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