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The Working Capital Channel and Cross-Sector Comovement

  • Yi Jin

    (The University of Kansas)

  • Zhixiong Zeng

    (Northwestern University)

This paper studies cross-sector comovement, one of the defining characteristics of the business cycle, in a monetary framework. We argue that monetary factors might be important for understanding this phenomenon through a working capital channel. We show that in a sticky portfolio adjustment model where firms borrow to finance working capital, a positive money supply shock drives the nominal interest rate down, thereby stimulating firms' borrowing and causing employment to rise in different sectors. A positive aggregate technology shock can also drive the nominal interest rate down upon impact and induce comovement when the elasticity of labor supply is large.

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Article provided by Missouri Valley Economic Association in its journal The Journal of Economics.

Volume (Year): 28 (2002)
Issue (Month): 1 ()
Pages: 51-65

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Handle: RePEc:mve:journl:v:28:y:2002:i:1:p:51-65
Contact details of provider: Web page: http://www.mvea.net
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