Financial frictions, capital reallocation, and aggregate fluctuations

Juergen von Hagen and Haiping Zhang ()

No B 03-2006, ZEI Working Papers from University of Bonn, ZEI - Center for European Integration Studies

Abstract: We address an important business cycle fact, i.e., the amplified and hump-shaped responses of output to productivity shocks, in a dynamic general equilibrium model with financial frictions. Models with financial frictions in the current literature have either the amplification mechanism or the propagation mechanism. Our model shows that the dynamic interaction of borrowing constraints, endogenous capital accumulation and capital reallocation among agents with different productivity constitutes a mechanism through which the effects of productivity shock on aggregate output are amplified and propagated, more in line with the empirical evidence than other related models in the literature.

Keywords: Amplification; Business cycles; Capital reallocation; Financial frictions; Propagation (search for similar items in EconPapers)
JEL-codes: E32 E44 G3 (search for similar items in EconPapers)
Date: 2006
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Journal Article: Financial frictions, capital reallocation, and aggregate fluctuations (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zeiwps:b032006

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