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Frictional Capital Reallocation I: Ex Ante Heterogeneity

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  • Randall Wright
  • Sylvia Xiaolin Xiao
  • Yu Zhu

Abstract

This paper studies dynamic general equilibrium models where firms trade capital in frictional markets. Gains from trade arise due to ex ante heterogeneity: some firms are better at investment, so they build capital in the primary market; others acquire it in the secondary market. Cases are considered with random search and bargaining, or directed search and posting. For each, we provide results on existence, uniqueness, efficiency and comparative statics. Monetary and fiscal policy are discussed at length. We also discuss how productivity dispersion can be countercyclical while capital reallocation and its price are procyclical.

Suggested Citation

  • Randall Wright & Sylvia Xiaolin Xiao & Yu Zhu, 2019. "Frictional Capital Reallocation I: Ex Ante Heterogeneity," Staff Working Papers 19-4, Bank of Canada.
  • Handle: RePEc:bca:bocawp:19-4
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    7. Wei Cui & Randall Wright & Yu Zhu, 2022. "Endogenous Liquidity and Capital Reallocation," Staff Working Papers 22-27, Bank of Canada.
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    9. Cun, Wukuang, 2022. "Endogenous lemons markets and information cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
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    11. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.

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    Keywords

    Monetary Policy;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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