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  5. Financial Frictions, Capital Misallocation, and Input-Output Linkages

Financial Frictions, Capital Misallocation, and Input-Output Linkages

  • Hsuan-Li Su
American Economic Journal: Macroeconomics
vol. 16, no. 2, April 2024
(pp. 62-94)
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Abstract

I study how input-output linkages amplify the aggregate impact of sectoral financial distortions in a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in allocative efficiency. A systematic uncertainty shock induces heterogenous responses in sectoral capital wedges, reducing allocative efficiency and aggregate total factor productivity (TFP). However, idiosyncratic sectoral uncertainty shocks may improve allocative efficiency and raise TFP. I then calibrate the model to US data. The network amplification magnitude on aggregate TFP ranges from 1.58 to 1.7.

Citation

Su, Hsuan-Li. 2024. "Financial Frictions, Capital Misallocation, and Input-Output Linkages." American Economic Journal: Macroeconomics, 16 (2): 62-94. DOI: 10.1257/mac.20190238

Additional Materials

JEL Classification

  • E22 Investment; Capital; Intangible Capital; Capacity
  • E23 Macroeconomics: Production
  • E25 Aggregate Factor Income Distribution
  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • G20 Financial Institutions and Services: General
  • G30 Corporate Finance and Governance: General
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