Title

Financial frictions, capital reallocation, and aggregate fluctuations

Publication Type

Journal Article

Publication Date

2008

Abstract

We address an important business cycle fact, i.e., the amplified and hump-shaped responses of output to productivity shocks, in a dynamic general equilibrium model with financial frictions. Models with financial frictions in the current literature have either the amplification mechanism or the propagation mechanism. Our model shows that the dynamic interaction of borrowing constraints, endogenous capital accumulation, and capital reallocation among agents with different productivity constitutes a mechanism through which the effects of productivity shock on aggregate output are amplified and propagated, more in line with the empirical evidence than other related models in the literature.

Keywords

Amplification, Business cycles, Capital reallocation, Financial frictions, Propagation

Discipline

Finance

Publication

Journal of Economic Dynamics and Control

Volume

32

Issue

3

First Page

978-999

ISSN

0165-1889

Identifier

10.1016/j.jedc.2007.04.003

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