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The price of capital and the financial accelerator

Roberto Pancrazi, Hernán D. Seoane and Marija Vukotic

Economics Letters, 2016, vol. 149, issue C, 86-89

Abstract: The price of capital is a key determinant of the financial accelerator, a transmission mechanism of shocks generated through the capital accumulation process of entrepreneurs that borrow in credit markets with frictions. This paper shows that the procedure of approximating the price of old capital by the net-of-depreciation price of new capital, as used in many articles since Bernanke et al. (1999), has profound implications when the capital depreciation rate is positive. When accounting for the appropriate price of capital, the effects of the financial accelerator are even stronger than originally assessed.

Keywords: Financial accelerator; Business fluctuations; Investment adjustment cost (search for similar items in EconPapers)
JEL-codes: E30 E44 E50 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:ecolet:v:149:y:2016:i:c:p:86-89