Capital Reallocation and Aggregate Productivity

39 Pages Posted: 10 Dec 2013

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Immo Schott

European University Institute

Date Written: December 2013

Abstract

This paper studies the productivity implications of the cyclical reallocation of capital. Frictions in the reallocation process are a source of factor misallocation. Cyclical movements in these frictions lead to variations in the degree of reallocation and thus in productivity. These frictions also impact the capital accumulation decision. The effects are quantitatively important in the presence of fluctuations in adjustment frictions and/or the cross sectional variation of profitability shocks. The cyclicality of the output loss due to costly reallocation depends on the joint distribution of capital and plant-level productivity. Instead of relying on approximative solution techniques we show analytically that a higher-order moment is needed to solve the model accurately. Even without aggregate productivity shocks, the model has quantitative properties that resemble those of a standard stochastic growth model: (i) persistent shocks to the Solow residual, (ii) positive co-movement of output, investment and consumption and (iii) consumption smoothing.

Suggested Citation

Cooper, Russell W. and Schott, Immo, Capital Reallocation and Aggregate Productivity (December 2013). NBER Working Paper No. w19715. Available at SSRN: https://ssrn.com/abstract=2366049

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Immo Schott

European University Institute

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