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Financial Friction, Capital Reallocation and News-Driven Business Cycles

40 Pages Posted: 11 Jul 2007  

Kaiji Chen

Emory University - Department of Economics; Federal Reserve Bank of Atlanta

Zheng Michael Song

Fudan University - School of Economics

Date Written: July 5, 2007

Abstract

In this paper, we show that news on future technological improvement can trigger an immediate economic expansion in a model with financial friction on capital allocation. The arrivial of good news on future technology reduces such frictions and generates significant increase in current Total Factor Productivity via capital reallocation. This triggers an immediate boom in output, consumption, investment and hours worked. Our empirical evidence using firm-level data supports strongly the above mechanisms for news to affect current aggregate productivity.

Keywords: Financial Friction, Capital Reallocation, Business Cycle

JEL Classification: E32, G34

Suggested Citation

Chen, Kaiji and Song, Zheng Michael, Financial Friction, Capital Reallocation and News-Driven Business Cycles (July 5, 2007). Available at SSRN: https://ssrn.com/abstract=998819 or http://dx.doi.org/10.2139/ssrn.998819

Kaiji Chen (Contact Author)

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

HOME PAGE: http://https://sites.google.com/site/chenkaiji/research

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Zheng Song

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

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