Investigating Fluctuations in U.S. Manufacturing: What are the Direct Effects of Informational Frictions?

FRB Richmond Working Paper No. 00-1

36 Pages Posted: 27 Nov 2012

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: July 1, 2000

Abstract

In this paper, we explore how informational frictions in credit markets directly affect U.S. manufacturing fluctuations. Within the context of a dynamic industry model, we propose a strategy for identifying intermediation costs related to informational asymmetries between lenders and borrowers. The analysis suggests that these costs have been steadily falling over the post-war period. We also present evidence that changes in the cost of intermediation should directly affect output, as opposed to just propagating the effects of other shocks. Finally, we find that the relative share of output fluctuations explained by financial innovations increases monotonically over time. Therefore, policy changes that reduce financial frictions, and thereby increase output, are likely to be most effective in the long run.

Keywords: intermediation, informational frictions, economic fluctuations

JEL Classification: E32, E44

Suggested Citation

Li, Wenli and Sarte, Pierre-Daniel, Investigating Fluctuations in U.S. Manufacturing: What are the Direct Effects of Informational Frictions? (July 1, 2000). FRB Richmond Working Paper No. 00-1. Available at SSRN: https://ssrn.com/abstract=2126757 or http://dx.doi.org/10.2139/ssrn.2126757

Wenli Li

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Pierre-Daniel Sarte (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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