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Frictional capital reallocation I: Ex ante heterogeneity

Randall Wright, Sylvia Xiaolin Xiao and Yu Zhu

Journal of Economic Dynamics and Control, 2018, vol. 89, issue C, 100-116

Abstract: We study dynamic general equilibrium models where capital is traded in frictional markets featuring liquidity considerations. Gains from trade arise from ex ante heterogeneity: some firms are better at investment, so they build capital in the primary market, while others acquire it in the secondary market. We consider specifications with random search and bargaining, as well as those with directed search and posting, and provide strong results for both on existence, uniqueness, efficiency and comparative statics. Monetary and fiscal policy are discussed in detail. Among other advantages, the framework is tractable enough to analyze using simple diagrams.

Keywords: Capital reallocation; Investment; Liquidity; Monetary and fiscal policy (search for similar items in EconPapers)
JEL-codes: E22 E44 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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