Capital Reallocation, Productivity, and Expectation-Driven Business Cycles
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.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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