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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
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    Handle: RePEc:nbr:nberwo:19715
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    1. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
    2. Francois Gourio & Jianjun Miao, 2009. "Firm Heterogeneity and the Long-run Effects of Dividend Tax Reform," NBER Working Papers 15044, National Bureau of Economic Research, Inc.
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    14. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
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