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Financial Intermediation and Capital Reallocation

Kai Li, Fang Yang and Hengjie Ai
Additional contact information
Kai Li: HKUST
Hengjie Ai: University of Minnesota

No 429, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a general equilibrium framework to quantify the importance of intermediated capital reallocation in affecting macroeconomic fluctuations and asset returns. In our model, financial intermediaries intermediate capital reallocation between low productivity firms with excess capital and high productivity firms who need credit. Because lending contracts cannot be perfectly enforced, capital misallocation lowers aggregate productivity when intermediaries are financially constrained. As a result, shocks originated from the financial sector manifest themselves as fluctuations in total factor productivity and account for most of the business cycle variations in macroeconomic quantities. Our model produces a pro-cyclical capital reallocation and is consistent with the stylized fact that the volatilities of productivity are counter-cyclical at both the firm and the aggregate level. On the asset pricing side, our model matches well moments of interest rate spreads in the data and successfully generates a high and counter-cyclical equity premium.

Date: 2015
New Economics Papers: this item is included in nep-ban, nep-bec and nep-dge
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Citations: View citations in EconPapers (5)

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Journal Article: Financial intermediation and capital reallocation (2020) Downloads
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