Financial frictions, capital misallocation and structural change

Naohisa Hirakata and Takeki Sunakawa

Journal of Macroeconomics, 2019, vol. 61, issue C, -

Abstract: We develop a two-sector growth model with financial frictions to examine the effects of a decline in the working population ratio and change in the structure of household demand on sectoral TFP and structural change. Our findings are twofold. First, with financial frictions, a decline in labor input reduces the real interest rate and increases excess demand for borrowing, tightening collateral constraints at a given credit-to-value ratio and generating capital misallocation and lower sectoral TFP. Second, compared to the case with no financial frictions, such changes in sectoral TFP impede structural change driven by the change in the structure of household demand. We also estimate the model’s parameters using the Japanese data and undertake a counter-factual simulation to demonstrate the role of financial frictions and capital misallocation in structural change.

Keywords: Financial frictions; Heterogeneous firms; Capital misallocation; Total factor productivity; Structural change (search for similar items in EconPapers)
JEL-codes: E23 E44 O41 O47 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Working Paper: Financial Frictions, Capital Misallocation, and Structural Change (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:61:y:2019:i:c:7

DOI: 10.1016/j.jmacro.2019.103127

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