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Financial Friction, Capital Reallocation and Expectation-Driven Business Cycles

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  • Chen, Kaiji
  • Song, Zheng

Abstract

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.

Suggested Citation

  • Chen, Kaiji & Song, Zheng, 2007. "Financial Friction, Capital Reallocation and Expectation-Driven Business Cycles," MPRA Paper 3889, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:3889
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    File URL: https://mpra.ub.uni-muenchen.de/3889/1/MPRA_paper_3889.pdf
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    References listed on IDEAS

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    Cited by:

    1. Stefano Eusepi & Bruce Preston, 2011. "Expectations, Learning, and Business Cycle Fluctuations," American Economic Review, American Economic Association, pages 2844-2872.
    2. Stefano Eusepi & Bruce Preston, 2009. "Labor Supply Heterogeneity and Macroeconomic Co-movement," NBER Working Papers 15561, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Financial Friction; Capital Reallocation; Business Cycle;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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