Financial Friction, Capital Reallocation and News-Driven Business Cycles
Emory University - Department of Economics
Zheng Michael Song
Fudan University - School of Economics
July 5, 2007
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
Date posted: July 11, 2007
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