Capital Allocative Disturbances and Economic Fluctuations

Abstract

Permanent sector-specific productivity shocks alter the relative marginal products of capital and labor across sectors, such that the existing factor allocations are suboptimal. The subsequent factor reallocations may involve the costly movement and redeployment of capital and labor across sectors. To proxy the magnitude of these disturbances, this paper focuses on capital, rather than labor, allocative disturbances, since firms can make temporary adjustments in employment levels in response to transitory sectoral shocks. Empirical evidence is provided that these costs reduce output from what it otherwise would have been and that this effect persists for up to three quarters. Copyright 1993 by MIT Press.