Capital Unemployment, Financial Shocks, and Investment Slumps

Pablo Ottonello

No 1153, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Recoveries from financial crises are characterized by low investment rates and declines in capital stocks. This paper constructs an equilibrium framework in which financial shocks have a persistent effect on aggregate investment. The key assumption is that physical capital is traded in a decentralized market with search frictions, generating 'capital unemployment.' After a negative financial shock, the share of unemployed capital is high, and the economy dedicates more resources to absorbing existing unemployed capital into production, and less to accumulating new capital. An estimation of the model for the U.S. economy using Bayesian techniques shows that the model can generate the investment persistence and half of the output persistence observed in the Great Recession. Investment search frictions also lead to a different interpretation of the sources of business-cycle fluctuations, with a larger role for financial shocks, which account for 33% of output fluctuations. Extending the model to allow for heterogeneity in match productivity, the framework also provides a mechanism for procyclical capital reallocation, as observed in the data.

Date: 2015
New Economics Papers: this item is included in nep-dge and nep-opm
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1153

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