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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

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 365.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:365
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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

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Find related papers by 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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Cited by:

  1. Epstein, Brendan & Shapiro, Alan Finkelstein, 2014. "Employment and Firm Heterogeneity, Capital Allocation, and Countercyclical Labor Market Policies," International Finance Discussion Papers 1115, Board of Governors of the Federal Reserve System (U.S.).
  2. André Kurmann, 2009. "Holdups and Overinvestment in Physical Capital Markets," Cahiers de recherche 0904, CIRPEE.
  3. Yong Kim, 2009. "Capital Reallocation and Liquidity with Search Frictions," 2009 Meeting Papers 72, Society for Economic Dynamics.
  4. Nicolas Petrosky-Nadeau, 2007. "The Macroeconomic Dynamics of Labor and Capital Market Imperfections," 2007 Meeting Papers 477, Society for Economic Dynamics.
  5. 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.
  6. Zsolt Becsi & Victor E. Li & Ping Wang, 2009. "Credit Mismatch and Breakdown," Villanova School of Business Department of Economics and Statistics Working Paper Series 7, Villanova School of Business Department of Economics and Statistics.
  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. Nicolas Petrosky-Nadeau, . "Endogenous Flows of Foreign Direct Investment and International Real Business Cycles," GSIA Working Papers 2011-E16, Carnegie Mellon University, Tepper School of Business.

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