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Financial Frictions

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  • Robert E. Hall

    (Hoover Institution and Department of Economics, Stanford University, National Bureau of Economic Research)

Abstract

A comprehensive measure of financial friction is the difference between the return businesses earn from capital—plant and equipment—and the market cost of capital. The latter is the amount that investors earn from holding financial claims. I measure this friction as the difference between the marginal product of capital adjusted for capital gains and losses on that capital and the short-term interest rate. The friction measured in that way rose to an unprecedented level after the financial crisis that began in late 2008 and remained high four years later. Macro models show that overall economic activity is seriously adversely affected by such a large widening of frictions.

Suggested Citation

  • Robert E. Hall, 2013. "Financial Frictions," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 155-163, June.
    • Handle: RePEc:ijc:ijcjou:y:2013:q:2:a:8
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    References listed on IDEAS

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    1. Robert E. Hall, 2010. "Why Does the Economy Fall to Pieces after a Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 3-20, Fall.
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    Cited by:

    1. Donal Smith, 2015. "Collateral Constraints and the Interest Rate," Discussion Papers 15/22, Department of Economics, University of York.
    2. Li, Xin & Su, Chi Wei, 2024. "Evaluating the impact of multiple uncertainty shocks on China's airline stocks volatility: A novel joint quantile perspective," Journal of Air Transport Management, Elsevier, vol. 121(C).
    3. Andrew Filardo & Marco Jacopo Lombardi & Marek Raczko, 2018. "Measuring financial cycle time," BIS Working Papers 755, Bank for International Settlements.
    4. Jiang, Dou & Weder, Mark, 2021. "American business cycles 1889–1913: An accounting approach," Journal of Macroeconomics, Elsevier, vol. 67(C).
    5. Wesselbaum, Dennis, 2019. "Jobless recoveries: The interaction between financial and search frictions," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    6. Angelos Angelopoulos & Konstantinos Angelopoulos & Spyridon Lazarakis & Apostolis Philippopoulos, 2021. "The distributional consequences of rent‐seeking," Economic Inquiry, Western Economic Association International, vol. 59(4), pages 1616-1640, October.
    7. Donal Smith, 2020. "Collateral Constraints and the Interest Rate," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(2), pages 137-165, May.
    8. Donal Smith, 2016. "The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach," Discussion Papers 16/07, Department of Economics, University of York.

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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