Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism

André Kurmann and Nicolas Petrosky-Nadeau

No 365, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Empirical evidence suggests that capital separation is an important phenomenon over and beyond depreciation and that reallocation is a costly and time-consuming process. In addition, both separation and reallocation rates display substantial variation over the business cycle. We build a dynamic general equilibrium model where capital separation occurs endogenously because of credit constraints and capital (re)allocation is costly due to search frictions and capital specificity. Compared to the frictionless counterpart but also compared to models of financial frictions without costly capital reallocation, our model matches surprisingly well the persistence in U.S. output growth. Furthermore, our model implies that productive capital stocks vary more than reported in the data, which has the potential to substantially reduce the volatility of technology shocks inferred from the Solow residual

Keywords: Credit Market Frictions; Capital Reallocation; Investment; Business Cycles; Output Growth Persistence (search for similar items in EconPapers)
JEL-codes: E22 E32 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Search Frictions in Physical Capital Markets as a Propagation Mechanism (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:365

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