The Working Capital Channel and Cross-Sector Comovement

Yi Jin () and Zhixiong Zeng

Journal of Economic Insight, 2002, vol. 28, issue 1, 51-65

Abstract: This paper studies cross-sector comovement, one of the defining characteristics of the business cycle, in a monetary framework. We argue that monetary factors might be important for understanding this phenomenon through a working capital channel. We show that in a sticky portfolio adjustment model where firms borrow to finance working capital, a positive money supply shock drives the nominal interest rate down, thereby stimulating firms' borrowing and causing employment to rise in different sectors. A positive aggregate technology shock can also drive the nominal interest rate down upon impact and induce comovement when the elasticity of labor supply is large.

JEL-codes: E32 E40 (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:mve:journl:v:28:y:2002:i:1:p:51-65

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