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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, 2017. "Credit misallocation during the European financial crisis," BIS Working Papers 669, Bank for International Settlements.
    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," Temi di discussione (Economic working papers) 1168, Bank of Italy, Economic Research and International Relations Area.
    4. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," BIS Working Papers 711, Bank for International Settlements.
    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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