Search Frictions in Physical Capital Markets as a Propagation Mechanism

CIRPEE Working Paper 07-12

44 Pages Posted: 14 May 2007

See all articles by André Kurmann

André Kurmann

Drexel University - LeBow College of Business

Nicolas Petrosky-Nadeau

University of Quebec at Montreal (UQAM) - Department of Economics

Date Written: May 2007

Abstract

We build a Dynamic General Equilibrium model with search frictions for the allocation of physical capital and investigate its implications for the business cycle. While the model is in principle capable of generating substantial internal propagation to small exogenous shocks, the quantitative effects are modest once we calibrate the model to fit firm-level capital flows. We then extend the model with credit market frictions that lead to countercyclical default and countercyclical risk premia as in the data. Countercyclical default directly affects capital reallocation and has important general equilibrium income effects on labor supply. Yet, for calibrations in line with observed consumption dynamics, we find that even in this extended model, search frictions in physical capital markets play only a small role for business cycle fluctuations.

Keywords: Capital allocation frictions, search and matching, credit frictions, business cycles, dynamic general equilibrium

JEL Classification: E22, E32, E44

Suggested Citation

Kurmann, André and Petrosky-Nadeau, Nicolas, Search Frictions in Physical Capital Markets as a Propagation Mechanism (May 2007). CIRPEE Working Paper 07-12, Available at SSRN: https://ssrn.com/abstract=985543 or http://dx.doi.org/10.2139/ssrn.985543

André Kurmann (Contact Author)

Drexel University - LeBow College of Business ( email )

School of Economics
3220 Market Street
Philadelphia, PA 19104
United States

Nicolas Petrosky-Nadeau

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
82
Abstract Views
833
rank
337,160
PlumX Metrics