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Frictional Capital Reallocation II: Ex Post Heterogeneity

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  • Randall Wright

    (University of Wisconsin)

  • Xiaolin Xiao

    (Economics Discipline Group)

  • Yu Zhu

    (Bank of Canada)

Abstract

In previous work we studied frictional markets for capital reallocation based on ex ante heterogeneity: similar firms enter the market with different capital stocks. Here we study ex post heterogeneity: firms with similar capital realize different productivity shocks. For different specifications, results are provided on existence, uniqueness, efficiency and the effects of monetary and fiscal policy. We show, e.g., how higher nominal rates can lower or raise investment, and can be desirable, despite hindering reallocation. The model can capture several stylized facts, e.g., misallocation appears countercyclical while capital reallocation and prices are procyclical. We also discuss how productivity dispersion may or may not accurately measure inefficiency and frictions.

Suggested Citation

  • Randall Wright & Xiaolin Xiao & Yu Zhu, 2018. "Frictional Capital Reallocation II: Ex Post Heterogeneity," 2018 Meeting Papers 544, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:544
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    1. Dong, Feng & Wang, Pengfei & Wen, Yi, 2020. "A search-based neoclassical model of capital reallocation," European Economic Review, Elsevier, vol. 128(C).
    2. Feng Dong, 2023. "Aggregate Implications of Financial Frictions for Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 45-71, April.
    3. Altermatt, Lukas & Iwasaki, Kohei & Wright, Randall, 2021. "Asset pricing in monetary economies," Journal of International Money and Finance, Elsevier, vol. 115(C).
    4. Lukas Altermatt & Christian Wipf, 2024. "Liquidity, the Mundell–Tobin Effect, and the Friedman Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 1235-1259, August.
    5. Darmouni, Olivier & Sutherland, Andrew, 2024. "Investment when new capital is hard to find," Journal of Financial Economics, Elsevier, vol. 154(C).
    6. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    7. Baughman, Garth & Rabinovich, Stanislav, 2021. "Capacity choice, monetary trade, and the cost of inflation," European Economic Review, Elsevier, vol. 134(C).
    8. Guillaume Rocheteau & Lucie Lebeau & Tai-Wei Hu & Younghwan In, 2018. "Gradual Bargaining in Decentralized Asset Markets," Working Papers 181904, University of California-Irvine, Department of Economics.
    9. Randall Wright & Sylvia Xiao & Yu Zhu, 2020. "Frictional Capital Reallocation with Ex Post Heterogeneity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 227-253, August.
    10. Cun, Wukuang, 2022. "Endogenous lemons markets and information cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    11. Lebeau, Lucie, 2020. "Credit frictions and participation in over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 189(C).

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