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Capital Misallocation during the Great Recession

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  • Di Nola, Alessandro

Abstract

In this paper I evaluate the contribution of financial frictions in explaining the drop in aggregate TFP through misallocation during the Great Recession. I build a quantitative model with heterogeneous establishments; with the help of the model I compute the counterfactual drop in misallocation: by how much would aggregate TFP have decreased if the credit crunch had been absent. I find that a "real recession" would have caused a drop of only 0.16 percent, as opposed to 1.04 percent found in the data; therefore financial frictions account for a significant part of the drop in aggregate TFP. The key mechanism is the following: the increase in the cost of external finance affects negatively the reallocation of productive inputs from low to high productivity firms, by dampening the growth of small-highly productive firms.

Suggested Citation

  • Di Nola, Alessandro, 2015. "Capital Misallocation during the Great Recession," MPRA Paper 68289, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:68289
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Capital Misallocation during the Great Recession
      by Christian Zimmermann in NEP-DGE blog on 2015-12-23 08:21:45

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    Cited by:

    1. Fabiano Schivardi & Enrico Sette & Guido Tabellini, 2022. "Credit Misallocation During the European Financial Crisis [Firms, failures, and fluctuations: the macroeconomics of supply chain disruptions]," Economic Journal, Royal Economic Society, vol. 132(641), pages 391-423.
    2. T. Libert, 2017. "Misallocation Before, During and After the Great Recession," Working papers 658, Banque de France.
    3. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," BIS Working Papers 711, Bank for International Settlements.
    4. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," Temi di discussione (Economic working papers) 1168, Bank of Italy, Economic Research and International Relations Area.
    5. Christian Abele & Agnès Bénassy-Quéré & Lionel Fontagné, 2020. "One Size Does Not Fit All: TFP in the Aftermath of Financial Crises in Three European Countries," PSE Working Papers halshs-02883685, HAL.
    6. Mr. Nicola Pierri & Francesco Manaresi, 2019. "Credit Supply and Productivity Growth," IMF Working Papers 2019/107, International Monetary Fund.

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    More about this item

    Keywords

    Financing constraints; misallocation; heterogeneous firms; incomplete markets; idiosyncratic shocks.;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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