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Capital Reallocation, Productivity, and Expectation-Driven Business Cycles

  • Zheng Song

    (Fudan university)

  • Kaiji Chen

    (University of Oslo)

In this paper, we show that news on future technological improvement can trigger an immediate economic expansion in a model with heterogenous productive efficiency. The key element in our model is financial friction on allocating capital from less productive to more productive projects. 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 increase in output, consumption, investment and hours worked.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 512.

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Date of creation: 2007
Date of revision:
Handle: RePEc:red:sed007:512
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
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  14. Caballero, Ricardo J & Hammour, Mohamad L, 1994. "The Cleansing Effect of Recessions," American Economic Review, American Economic Association, vol. 84(5), pages 1350-68, December.
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  17. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  18. Barlevy, Gadi, 2003. "Credit market frictions and the allocation of resources over the business cycle," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1795-1818, November.
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