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http://ssrn.com/abstract=998819
 
 

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Financial Friction, Capital Reallocation and News-Driven Business Cycles


Kaiji Chen


Emory University - Department of Economics

Zheng Michael Song


Fudan University - School of Economics

July 5, 2007


Abstract:     
In this paper, we show that news on future technological improvement can trigger an immediate economic expansion in a model with financial friction on capital allocation. The arrivial of good news on future technology reduces such frictions and generates significant increase in current Total Factor Productivity via capital reallocation. This triggers an immediate boom in output, consumption, investment and hours worked. Our empirical evidence using firm-level data supports strongly the above mechanisms for news to affect current aggregate productivity.

Number of Pages in PDF File: 40

Keywords: Financial Friction, Capital Reallocation, Business Cycle

JEL Classification: E32, G34

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Date posted: July 11, 2007  

Suggested Citation

Chen, Kaiji and Song, Zheng Michael, Financial Friction, Capital Reallocation and News-Driven Business Cycles (July 5, 2007). Available at SSRN: http://ssrn.com/abstract=998819 or http://dx.doi.org/10.2139/ssrn.998819

Contact Information

Kaiji Chen (Contact Author)
Emory University - Department of Economics ( email )
1602 Fishburne Drive
Atlanta, GA 30322
United States
HOME PAGE: http://userwww.service.emory.edu/~kchen30/
Zheng Song
Fudan University - School of Economics ( email )
600 GuoQuan Road
Shanghai, 200433
China
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