Financial Frictions

Robert Hall ()

International Journal of Central Banking, 2013, vol. 9, issue 2, 155-163

Abstract: A comprehensive measure of financial friction is the difference between the return businesses earn from capital—plant and equipment—and the market cost of capital. The latter is the amount that investors earn from holding financial claims. I measure this friction as the difference between the marginal product of capital adjusted for capital gains and losses on that capital and the short-term interest rate. The friction measured in that way rose to an unprecedented level after the financial crisis that began in late 2008 and remained high four years later. Macro models show that overall economic activity is seriously adversely affected by such a large widening of frictions.

JEL-codes: E3 E5 G11 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (9)

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