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Financial Friction, Capital Reallocation and Expectation-Driven Business Cycles

  • Chen, Kaiji
  • Song, Zheng

In this paper, we show that news on future technological improvement can trigger an immediate economic expansion in a model with financial friction on capital allocation. The arrivial of good news on future technology reduces such frictions and generates significant increase in current Total Factor Productivity via capital reallocation. This triggers an immediate boom in output, consumption, investment and hours worked. Our empirical evidence using firm-level data supports strongly the above mechanisms for news to affect current aggregate productivity.

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File URL: http://mpra.ub.uni-muenchen.de/3889/1/MPRA_paper_3889.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3889.

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Date of creation: 05 Jul 2007
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Handle: RePEc:pra:mprapa:3889
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