Financial Frictions, Capital Misallocation, and Input-Output Linkages

Hsuan-Li Su

No 978, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies how input-output linkages amplify the aggregate impact of sectoral financial distortions through the lens of a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in capital allocative efficiency. Uncertainty shocks, second-moment shocks to Solow-neutral (capital-augmenting) productivity, induce heterogenous responses in sectoral capital wedges, reducing allocative efficiency and aggregate TFP. In the calibrated model to the U.S. data, I show input-output linkages amplify the aggregate effect of financial distortions by two-fold more than an equivalent economy without linkages. Shocks that generates the spike of credit spreads similar to the magnitude during the Great Recession can decrease aggregate TFP by 0.3\% and aggregate output by 1.6\%. Among all sectors, the model indicates that the Financial sector is most sensitive to changes in its financial constraint and has the largest impact on aggregate output.

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-fdg
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Citations: View citations in EconPapers (7)

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Journal Article: Financial Frictions, Capital Misallocation, and Input-Output Linkages (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:978

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