Financial Frictions, Capital Misallocation, and Input-Output Linkages

Hsuan-Li Su

American Economic Journal: Macroeconomics, 2024, vol. 16, issue 2, 62-94

Abstract: I study how input-output linkages amplify the aggregate impact of sectoral financial distortions in a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in allocative efficiency. A systematic uncertainty shock induces heterogenous responses in sectoral capital wedges, reducing allocative efficiency and aggregate total factor productivity (TFP). However, idiosyncratic sectoral uncertainty shocks may improve allocative efficiency and raise TFP. I then calibrate the model to US data. The network amplification magnitude on aggregate TFP ranges from 1.58 to 1.7.

JEL-codes: E22 E23 E25 E32 E44 G20 G30 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Financial Frictions, Capital Misallocation, and Input-Output Linkages (2019)
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DOI: 10.1257/mac.20190238

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