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Frictional Capital Reallocation I: Ex Ante Heterogeneity

Author

Listed:
  • Randall Wright
  • Sylvia Xiaolin Xiao
  • Yu Zhu
Abstract
This paper studies dynamic general equilibrium models where firms trade capital in frictional markets. Gains from trade arise due to ex ante heterogeneity: some firms are better at investment, so they build capital in the primary market; others acquire it in the secondary market. Cases are considered with random search and bargaining, or directed search and posting. For each, we provide results on existence, uniqueness, efficiency and comparative statics. Monetary and fiscal policy are discussed at length. We also discuss how productivity dispersion can be countercyclical while capital reallocation and its price are procyclical.

Suggested Citation

  • Randall Wright & Sylvia Xiaolin Xiao & Yu Zhu, 2019. "Frictional Capital Reallocation I: Ex Ante Heterogeneity," Staff Working Papers 19-4, Bank of Canada.
    • Handle: RePEc:bca:bocawp:19-4
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    4. Altermatt, Lukas & Iwasaki, Kohei & Wright, Randall, 2021. "Asset pricing in monetary economies," Journal of International Money and Finance, Elsevier, vol. 115(C).
    5. 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.
    6. Baughman, Garth & Rabinovich, Stanislav, 2021. "Capacity choice, monetary trade, and the cost of inflation," European Economic Review, Elsevier, vol. 134(C).
    7. Darmouni, Olivier & Sutherland, Andrew, 2024. "Investment when new capital is hard to find," Journal of Financial Economics, Elsevier, vol. 154(C).
    8. Wei Cui & Randall Wright & Yu Zhu, 2022. "Endogenous Liquidity and Capital Reallocation," Staff Working Papers 22-27, Bank of Canada.
    9. Cun, Wukuang, 2022. "Endogenous lemons markets and information cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    10. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    11. 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.

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    Keywords

    Monetary Policy;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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