Capital-Reallocation Frictions and Trade Shocks
89 Pages Posted: 22 Oct 2019
Date Written: May 2020
"What are the short- and medium-term effects of an international-trade shock that increases competition for domestic manufacturing firms? We address this question by combining firm-level investment data from Peruvian manufacturing, bilateral trade-flows between Peru and China, and a quantitative general-equilibrium model with heterogeneous firms subject to idiosyncratic shocks. In the data, we find evidence of substantial frictions that slow capital reallocation, either through disinvestment or firm exit. In our model, these frictions induce slow transitional dynamics after a trade shock, with gradual productivity gains. On impact, a spike in inaction increases the aggregate productivity wedge relative to a frictionless" "benchmark."
Keywords: Trade shocks, Investment irreversibility, Capital reallocation
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