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Indiana University Bloomington

BEPP

The Kelley Advantage

The department is home to the authors of Managerial Economics and Business Strategy and Games and Information: An Introduction to Game Theory, two of the nation’s leading textbooks in the field.

Research and Publications

Journal Articles

Financial Frictions, Capital Reallocation, and Aggregate Fluctuations

2008, Journal of Economic Dynamics and Control

Jürgen von Hagen, Haiping Zhang

Abstract

We address an important business cycle fact, i.e., the amplified and hump-shaped responses of output to productivity shocks, in a dynamic general equilibrium model with financial frictions. Models with financial frictions in the current literature have either the amplification mechanism or the propagation mechanism. Our model shows that the dynamic interaction of borrowing constraints, endogenous capital accumulation, and capital reallocation among agents with different productivity constitutes a mechanism through which the effects of productivity shock on aggregate output are amplified and propagated, more in line with the empirical evidence than other related models in the literature.

Citation

von Hagen, Jürgen and Haiping Zhang (2008), “Financial Frictions, Capital Reallocation, and Aggregate Fluctuations,” Journal of Economic Dynamics and Control, Vol. 32, No. 3, pp. 978-999.

Keywords

Amplification; Business cycles; Capital reallocation; Financial frictions; Propagation