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Capital Reallocation and Aggregate Productivity

  • Russell W. Cooper
  • Immo Schott
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    This paper studies the productivity implications of the cyclical reallocation of capital. Frictions in the reallocation process are a source of factor misallocation. Cyclical movements in these frictions lead to variations in the degree of reallocation and thus in productivity. These frictions also impact the capital accumulation decision. The effects are quantitatively important in the presence of fluctuations in adjustment frictions and/or the cross sectional variation of profitability shocks. The cyclicality of the output loss due to costly reallocation depends on the joint distribution of capital and plant-level productivity. Instead of relying on approximative solution techniques we show analytically that a higher-order moment is needed to solve the model accurately. Even without aggregate productivity shocks, the model has quantitative properties that resemble those of a standard stochastic growth model: (i) persistent shocks to the Solow residual, (ii) positive co-movement of output, investment and consumption and (iii) consumption smoothing.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19715.

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    Date of creation: Dec 2013
    Date of revision:
    Handle: RePEc:nbr:nberwo:19715
    Note: EFG
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    1. Julia K. Thomas, 2002. "Is lumpy investment relevant for the business cycle?," Staff Report 302, Federal Reserve Bank of Minneapolis.
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    11. Russell Cooper & Joao Ejarque, 1994. "Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis," NBER Working Papers 4819, National Bureau of Economic Research, Inc.
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    14. Chang-Tai Hsieh & Peter Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," Working Papers 09-04, Center for Economic Studies, U.S. Census Bureau.
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    18. Den Haan, Wouter J., 2010. "Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 79-99, January.
    19. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
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