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Financial Frictions, Capital Misallocation, and Input-Output Linkages

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  • Hsuan-Li Su

    (National Taiwan University)

Abstract

This paper studies how input-output linkages amplify the aggregate impact of sectoral financial distortions through the lens of a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in capital allocative efficiency. Uncertainty shocks, second-moment shocks to Solow-neutral (capital-augmenting) productivity, induce heterogenous responses in sectoral capital wedges, reducing allocative efficiency and aggregate TFP. In the calibrated model to the U.S. data, I show input-output linkages amplify the aggregate effect of financial distortions by two-fold more than an equivalent economy without linkages. Shocks that generates the spike of credit spreads similar to the magnitude during the Great Recession can decrease aggregate TFP by 0.3\% and aggregate output by 1.6\%. Among all sectors, the model indicates that the Financial sector is most sensitive to changes in its financial constraint and has the largest impact on aggregate output.

Suggested Citation

  • Hsuan-Li Su, 2019. "Financial Frictions, Capital Misallocation, and Input-Output Linkages," 2019 Meeting Papers 978, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:978
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    References listed on IDEAS

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    1. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1-38.
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    3. Simon Gilchrist & Jae W. Sim & Egon Zakrajsek, 2013. "Misallocation and Financial Market Frictions: Some Direct Evidence from the Dispersion in Borrowing Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 159-176, January.
    4. Shaowen Luo, 2020. "Propagation of Financial Shocks in an Input-Output Economy with Trade and Financial Linkages of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 246-269, April.
    5. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
    6. Ireland, Peter N., 2004. "A method for taking models to the data," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1205-1226, March.
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    Cited by:

    1. Hao, Yu & Gai, Zhiqiang & Wu, Haitao, 2020. "How do resource misallocation and government corruption affect green total factor energy efficiency? Evidence from China," Energy Policy, Elsevier, vol. 143(C).

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