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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:

  • Takeki Sunakawa

    (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, International Department), Bank of Japan (E-mail:


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.

Suggested Citation

  • Naohisa Hirakata & Takeki Sunakawa, 2013. "Financial Frictions, Capital Misallocation, and Structural Change," IMES Discussion Paper Series 13-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:13-e-06

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    References listed on IDEAS

    1. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters,in: The Economics of an Ageing Population, chapter 2 Edward Elgar Publishing.
    2. Benjamin Moll, 2014. "Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?," American Economic Review, American Economic Association, vol. 104(10), pages 3186-3221, October.
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    7. 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.
    8. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
    9. James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
    10. 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.
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    More about this item


    Financial frictions; heterogeneous firms; capital misallocation; total factor productivity; structural change;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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