Financial Intermediation and Capital Reallocation

Posted: 2 Dec 2016

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Carlson School of Management; University of Minnesota - Twin Cities - Carlson School of Management

Kai Li

Peking University HSBC Business School

Fang Yang

Louisiana State University, Baton Rouge

Date Written: November 2, 2016

Abstract

To understand the link between financial intermediation activities and the real economy, we build a general equilibrium model in which agency frictions in the financial sector affect the efficiency of capital reallocation across firms and generate aggregate economic fluctuations. We develop a recursive policy iteration approach to fully characterize the nonlinear equilibrium dynamics and the off-steady-state crisis behavior. In our model, adverse shocks to agency frictions exacerbate capital misallocation and manifest themselves as variations in total factor productivity at the aggregate level. Our model endogenously generates countercyclical volatility in aggregate time-series and countercyclical dispersion of marginal product of capital and asset returns in the cross-section.

Keywords: financial Intermediation, Capital Misallocation, Volatility, Crisis, Limited enforcement

Suggested Citation

Ai, Hengjie and Ai, Hengjie and Li, Kai and Yang, Fang, Financial Intermediation and Capital Reallocation (November 2, 2016). Available at SSRN: https://ssrn.com/abstract=2877774

Hengjie Ai (Contact Author)

University of Minnesota - Carlson School of Management ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Kai Li

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

HOME PAGE: http://sites.google.com/site/kailiwebpage

Fang Yang

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

HOME PAGE: http://faculty.bus.lsu.edu/fyang/

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