Capital Misallocation During the Great Recession
47 Pages Posted: 11 Sep 2017
Date Written: August 1, 2016
In this paper I evaluate the contribution of financial frictions in explaining the drop in aggregate TFP through misallocation during the Great Recession. I build a quantitative model with heterogeneous establishments; with the help of the model I compute the counterfactual drop in misallocation: by how much would aggregate TFP have decreased if the credit crunch had been absent. I find that a "real recession" would have caused a drop of only 0.16 percent, as opposed to 1.04 percent found in the data; therefore financial frictions account for a significant part of the drop in aggregate TFP. The key mechanism is the following: the increase in the cost of external finance affects negatively the reallocation of productive inputs from low to high productivity firms, by dampening the growth of small-highly productive firms.
Keywords: Financing constraints, misallocation, heterogeneous firms, incomplete markets, idiosyncratic shocks
JEL Classification: D21, D22, E32, G31
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