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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
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Handle: RePEc:red:sed007:512
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