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Capital reallocation: A tale of two frictions

Wei Wang

Scottish Journal of Political Economy, 2021, vol. 68, issue 2, 179-208

Abstract: This paper explores the role of search and financial frictions in the used capital market. A tractable dynamic general equilibrium model with both frictions is developed to account for procyclicality of reallocation and the price of used capital. Both the aggregate productivity shock and the financial shock can generate procyclical reallocation of used capital. Quantitatively, the financial shock accounts for almost all the variation of used capital reallocation. The aggregate productivity shock is more responsible for the variation of the price of used capital as well as variables outside the used capital market.

Date: 2021
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Handle: RePEc:bla:scotjp:v:68:y:2021:i:2:p:179-208