Financial Friction, Capital Reallocation and Expectation-Driven Business Cycles

Kaiji Chen () and Zheng Michael Song ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we show that news on future technological improvement can trigger an immediate economic expansion in a model with financial friction on capital allocation. The arrivial of good news on future technology reduces such frictions and generates significant increase in current Total Factor Productivity via capital reallocation. This triggers an immediate boom in output, consumption, investment and hours worked. Our empirical evidence using firm-level data supports strongly the above mechanisms for news to affect current aggregate productivity.

Keywords: Financial Friction; Capital Reallocation; Business Cycle (search for similar items in EconPapers)
JEL-codes: G34 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2007-07-05
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:3889

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