Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?

Benjamin Moll

American Economic Review, 2014, vol. 104, issue 10, 3186-3221

Abstract: I develop a highly tractable general equilibrium model in which heterogeneous producers face collateral constraints, and study the effect of financial frictions on capital misallocation and aggregate productivity. My economy is isomorphic to a Solow model but with time-varying TFP. I argue that the persistence of idiosyncratic productivity shocks determines both the size of steady-state productivity losses and the speed of transitions: if shocks are persistent, steady-state losses are small but transitions are slow. Even if financial frictions are unimportant in the long run, they tend to matter in the short run and analyzing steady states only can be misleading.

JEL-codes: E21 E22 E23 G32 L26 O16 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.10.3186
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Citations: View citations in EconPapers (562)

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