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Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism

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  • Andre Kurmann

    () (Economics UQAM)

  • Nicolas Petrosky-Nadeau

Abstract

Empirical evidence suggests that capital separation is an important phenomenon over and beyond depreciation and that reallocation is a costly and time-consuming process. In addition, both separation and reallocation rates display substantial variation over the business cycle. We build a dynamic general equilibrium model where capital separation occurs endogenously because of credit constraints and capital (re)allocation is costly due to search frictions and capital specificity. Compared to the frictionless counterpart but also compared to models of financial frictions without costly capital reallocation, our model matches surprisingly well the persistence in U.S. output growth. Furthermore, our model implies that productive capital stocks vary more than reported in the data, which has the potential to substantially reduce the volatility of technology shocks inferred from the Solow residual

Suggested Citation

  • Andre Kurmann & Nicolas Petrosky-Nadeau, 2006. "Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism," 2006 Meeting Papers 365, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:365
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    Cited by:

    1. Victor E. Li, 2012. "Monetary Transmission and the Search for Liquidity," Villanova School of Business Department of Economics and Statistics Working Paper Series 19, Villanova School of Business Department of Economics and Statistics.
    2. repec:eee:deveco:v:127:y:2017:i:c:p:25-41 is not listed on IDEAS
    3. André Kurmann, 2009. "Holdups and Overinvestment in Physical Capital Markets," Cahiers de recherche 0904, CIRPEE.
    4. Nicolas Petrosky-Nadeau, "undated". "Endogenous Flows of Foreign Direct Investment and International Real Business Cycles," GSIA Working Papers 2011-E16, Carnegie Mellon University, Tepper School of Business.
    5. repec:eee:jetheo:v:173:y:2018:i:c:p:231-256 is not listed on IDEAS
    6. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2013. "Credit mismatch and breakdown," European Economic Review, Elsevier, vol. 59(C), pages 109-125.
    7. Finkelstein Shapiro, Alan, 2014. "Self-employment and business cycle persistence: Does the composition of employment matter for economic recoveries?," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 200-218.
    8. Kurmann, André, 2014. "Holdups and overinvestment in capital markets," Journal of Economic Theory, Elsevier, vol. 151(C), pages 88-113.
    9. Alan Finkelstein-Shapiro & Miguel Sarzosa, 2012. "Unemployement Protection for Informal Workers in Latin America and the Caribbean," IDB Publications (Working Papers) 4542, Inter-American Development Bank.
    10. Nicolas Petrosky-Nadeau, 2007. "The Macroeconomic Dynamics of Labor and Capital Market Imperfections," 2007 Meeting Papers 477, Society for Economic Dynamics.
    11. Epstein, Brendan & Finkelstein Shapiro, Alan, 2017. "Employment and firm heterogeneity, capital allocation, and countercyclical labor market policies," Journal of Development Economics, Elsevier, vol. 127(C), pages 25-41.
    12. Kurmann, André & Rabinovich, Stanislav, 2018. "Dynamic inefficiency in decentralized capital markets," Journal of Economic Theory, Elsevier, vol. 173(C), pages 231-256.
    13. Yong Kim, 2009. "Capital Reallocation and Liquidity with Search Frictions," 2009 Meeting Papers 72, Society for Economic Dynamics.

    More about this item

    Keywords

    Credit Market Frictions; Capital Reallocation; Investment; Business Cycles; Output Growth Persistence;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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