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Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism

Author

Listed:
  • Andre Kurmann

    (Economics UQAM)

  • Nicolas Petrosky-Nadeau
Abstract
Empirical evidence suggests that capital separation is an important phenomenon over and beyond depreciation and that reallocation is a costly and time-consuming process. In addition, both separation and reallocation rates display substantial variation over the business cycle. We build a dynamic general equilibrium model where capital separation occurs endogenously because of credit constraints and capital (re)allocation is costly due to search frictions and capital specificity. Compared to the frictionless counterpart but also compared to models of financial frictions without costly capital reallocation, our model matches surprisingly well the persistence in U.S. output growth. Furthermore, our model implies that productive capital stocks vary more than reported in the data, which has the potential to substantially reduce the volatility of technology shocks inferred from the Solow residual

Suggested Citation

  • Andre Kurmann & Nicolas Petrosky-Nadeau, 2006. "Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism," 2006 Meeting Papers 365, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:365
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    Cited by:

    1. Baley, Isaac & Blanco, Andres, 2022. "The Long-Run Effects of Corporate Tax Reforms," CEPR Discussion Papers 16936, C.E.P.R. Discussion Papers.
    2. Pablo Ottonello, 2015. "Capital Unemployment, Financial Shocks, and Investment Slumps," 2015 Meeting Papers 1153, Society for Economic Dynamics.
    3. Dong, Feng & Wang, Pengfei & Wen, Yi, 2020. "A search-based neoclassical model of capital reallocation," European Economic Review, Elsevier, vol. 128(C).
    4. Wei Cui & Sören Radde, 2020. "Search-based Endogenous Asset Liquidity and the Macroeconomy [Why Don’t US Issuers Demand European Fees for IPOs?]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2221-2269.
    5. André Kurmann, 2009. "Holdups and Overinvestment in Physical Capital Markets," Cahiers de recherche 0904, CIRPEE.
    6. Nicolas Petrosky-Nadeau, "undated". "Endogenous Flows of Foreign Direct Investment and International Real Business Cycles," GSIA Working Papers 2011-E16, Carnegie Mellon University, Tepper School of Business.
    7. Becsi, Zsolt & Li, Victor E. & Wang, Ping, 2013. "Credit mismatch and breakdown," European Economic Review, Elsevier, vol. 59(C), pages 109-125.
    8. Sanjay K. Chugh & Andre Kurmann & David M. Arseneau, 2009. "Optimal Capital Taxation in an Economy with Capital Allocation Frictions," 2009 Meeting Papers 147, Society for Economic Dynamics.
    9. Finkelstein-Shapiro, Alan & Sarzosa, Miguel, 2012. "Unemployement Protection for Informal Workers in Latin America and the Caribbean," IDB Publications (Working Papers) 4542, Inter-American Development Bank.
    10. Isaac Baley & Andrés Blanco, 2021. "Aggregate Dynamics in Lumpy Economies," Econometrica, Econometric Society, vol. 89(3), pages 1235-1264, May.
    11. Wright, Randall & Xiao, Sylvia Xiaolin & Zhu, Yu, 2018. "Frictional capital reallocation I: Ex ante heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 100-116.
    12. Marco Airaudo & María Pía Olivero, 2019. "Optimal Monetary Policy with Countercyclical Credit Spreads," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(4), pages 787-829, June.
    13. Kurmann, André & Rabinovich, Stanislav, 2018. "Dynamic inefficiency in decentralized capital markets," Journal of Economic Theory, Elsevier, vol. 173(C), pages 231-256.
    14. Victor E. Li, 2012. "Monetary Transmission and the Search for Liquidity," Villanova School of Business Department of Economics and Statistics Working Paper Series 19, Villanova School of Business Department of Economics and Statistics.
    15. Epstein, Brendan & Finkelstein Shapiro, Alan, 2017. "Employment and firm heterogeneity, capital allocation, and countercyclical labor market policies," Journal of Development Economics, Elsevier, vol. 127(C), pages 25-41.
    16. Alan Finkelstein Shapiro & Andres Gonzalez Gomez & Jessica Roldan-Pena & Victoria Nuguer, 2018. "Price Dynamics and the Financing Structure of Firms in Emerging Economies," 2018 Meeting Papers 339, Society for Economic Dynamics.
    17. Randall Wright & Xiaolin Xiao & Yu Zhu, 2018. "Frictional Capital Reallocation II: Ex Post Heterogeneity," 2018 Meeting Papers 544, Society for Economic Dynamics.
    18. Wei Wang, 2021. "Capital reallocation: A tale of two frictions," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(2), pages 179-208, May.
    19. Finkelstein Shapiro, Alan, 2014. "Self-employment and business cycle persistence: Does the composition of employment matter for economic recoveries?," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 200-218.
    20. Kurmann, André, 2014. "Holdups and overinvestment in capital markets," Journal of Economic Theory, Elsevier, vol. 151(C), pages 88-113.
    21. Nicolas Petrosky-Nadeau, 2007. "The Macroeconomic Dynamics of Labor and Capital Market Imperfections," 2007 Meeting Papers 477, Society for Economic Dynamics.
    22. Victor E. Li, 2018. "Search, Financial Market Frictions, and Monetary Transmission," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1935-1968, December.
    23. Meier, Matthias, 2017. "Time to Build and the Business Cycle," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168059, Verein für Socialpolitik / German Economic Association.
    24. Isaac Baley & Andrés Blanco, 2022. "The Macroeconomics of Partial Irreversibility," Working Papers 1312, Barcelona School of Economics.
    25. Yong Kim, 2009. "Capital Reallocation and Liquidity with Search Frictions," 2009 Meeting Papers 72, Society for Economic Dynamics.

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    More about this item

    Keywords

    Credit Market Frictions; Capital Reallocation; Investment; Business Cycles; Output Growth Persistence;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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