Frictional Capital Reallocation II: Ex Post Heterogeneity

Randall Wright, Xiaolin Xiao and Yu Zhu
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Xiaolin Xiao: Economics Discipline Group

No 544, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: In previous work we studied frictional markets for capital reallocation based on ex ante heterogeneity: similar firms enter the market with different capital stocks. Here we study ex post heterogeneity: firms with similar capital realize different productivity shocks. For different specifications, results are provided on existence, uniqueness, efficiency and the effects of monetary and fiscal policy. We show, e.g., how higher nominal rates can lower or raise investment, and can be desirable, despite hindering reallocation. The model can capture several stylized facts, e.g., misallocation appears countercyclical while capital reallocation and prices are procyclical. We also discuss how productivity dispersion may or may not accurately measure inefficiency and frictions.

Date: 2018
New Economics Papers: this item is included in nep-dge
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