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Investment Frictions and the Aggregate Output Loss in China

  • Guiying (Laura) Wu

    (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.)

Investment frictions reduce, delay or protract investment expenditure that is necessary for ?rms to capture growth opportunities. Using a capital adjust- ment costs framework, this paper estimates the gap between China?s actual and frictionless aggregate output. It applies the method of simulated moments to a fully structural investment model on a panel of Chinese ?rms; and takes into ac- count potential unobserved heterogeneities and measurement errors in the data. The estimated capital adjustment costs are substantial and vary across ?rms of di¤erent sizes, and across regions with di¤erent investment environments. If Chinese ?rms had faced a lower level of adjustment costs such as in the U.S., China?s aggregate output would be 25% higher.

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Paper provided by Nanyang Technological University, School of Humanities and Social Sciences, Economic Growth Centre in its series Economic Growth Centre Working Paper Series with number 1307.

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Length: 38 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:nan:wpaper:1307
Contact details of provider: Postal: Nanyang Drive, Singapore 637332
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