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Financial Frictions, Capital Misallocation, and Structural Change

  • Naohisa Hirakata

    (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp))

  • Takeki Sunakawa

    (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, International Department), Bank of Japan (E-mail: takeki.sunakawa@boj.or.jp))

We develop a two-sector growth model with financial frictions to examine the effects of a decline in the working population ratio and change in the structure of household demand on sectoral TFP and structural change. Our findings are twofold. First, with financial frictions, a decline in labor input reduces the real interest rate and increases excess demand for borrowing, tightening collateral constraints at a given credit-to-value ratio and generating capital misallocation and lower sectoral TFP. Second, compared to the case with no financial frictions, such changes in sectoral TFP impede structural changes driven by the change in the structure of household demand.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 13-E-06.

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Date of creation: Jun 2013
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Handle: RePEc:ime:imedps:13-e-06
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  1. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotak, 2007. "Capital flows and asset prices," LSE Research Online Documents on Economics 3168, London School of Economics and Political Science, LSE Library.
    • Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2009. "Capital Flows and Asset Prices," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 175-216 National Bureau of Economic Research, Inc.
  2. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
  3. SchmitzJr, James A., 2001. "Government production of investment goods and aggregate labor productivity," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 163-187, February.
  4. James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
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  6. Fumio Hayashi & Edward C. Prescott, 2000. "The 1990s in Japan: a lost decade," Working Papers 607, Federal Reserve Bank of Minneapolis.
  7. Esteban-Pretel, Julen & Sawada, Yasuyuki, 2014. "On the role of policy interventions in structural change and economic development: The case of postwar Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 67-83.
  8. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2006. "Business cycle accounting," Staff Report 328, Federal Reserve Bank of Minneapolis.
  9. Francisco J. Buera & Joseph Kaboski & Yongseok Shin, 2009. "Finance and Development: A Tale of Two Sectors," NBER Working Papers 14914, National Bureau of Economic Research, Inc.
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