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Title:Financial frictions, capital reallocation, and aggregate fluctuations PDF Logo
Authors:von Hagen, Jürgen
Zhang, Haiping
Issue Date:2006
Series/Report no.:ZEI working paper B 03-2006
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.
Subjects:Amplification
Business cycles
Capital reallocation
Financial frictions
Propagation
JEL:E32
E44
G3
Document Type:Working Paper
Appears in Collections:ZEI Working Papers, Zentrum für Europäische Integrationsforschung, Universität Bonn

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