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The Sources of Capital Misallocation in Europe

Author

Listed:
  • Byrne, Stephen

    (Central Bank of Ireland)

  • Goodhead, Robert

    (Central Bank of Ireland)

Abstract

This paper decomposes the sources of capital misallocation at the country and industry level in Europe. Using a comprehensive dataset of European firms from 19 countries, we find that the majority of the observed misallocation stems from persistent firm-specific distortions, with a smaller role for adjustment costs and uncertainty. We document substantial differences in the sources of misallocation across industries. Our analysis reveals strong correlations between these permanent distortions and industry-level variation in both financial factors, and factors relating to productivity. Understanding the factors driving capital misallocation is important for policymakers seeking to address productivity constraints and stimulate growth in the long run.

Suggested Citation

  • Byrne, Stephen & Goodhead, Robert, 2025. "The Sources of Capital Misallocation in Europe," Research Technical Papers 11/RT/25, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:11/rt/25
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/the-sources-of-capital-misallocation-in-europe.pdf?sfvrsn=1eb3691a_3
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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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