Financial intermediation and capital reallocation

Hengjie Ai, Kai Li and Fang Yang

Journal of Financial Economics, 2020, vol. 138, issue 3, 663-686

Abstract: To understand the link between financial intermediation activities and the real economy, we build a general equilibrium model in which agency frictions in the financial sector affect the efficiency of capital reallocation across firms and generate aggregate economic fluctuations. We develop a recursive policy iteration approach to fully characterize the nonlinear equilibrium dynamics and the off-steady-state crisis behavior. In our model, adverse shocks to agency frictions exacerbate capital misallocation and manifest themselves as variations in total factor productivity at the aggregate level. Our model endogenously generates countercyclical volatility in the aggregate time series and countercyclical dispersion in the marginal product of capital and asset returns in the cross-section.

Keywords: Financial intermediation; Capital misallocation; Volatility; Crisis; Limited enforcement (search for similar items in EconPapers)
JEL-codes: E20 E32 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Working Paper: Financial Intermediation and Capital Reallocation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:3:p:663-686

DOI: 10.1016/j.jfineco.2020.06.017

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