Frictional Capital Markets and Economic GrowthÂ
This paper develops an endogenous growth model where firms face idiosyncratic productivity shocks, necessitating capital reallocation. Capital goods trade in a frictional dealer market, giving rise to a distribution of capital holdings and Tobin's q across firms. The model highlights the intricate relationship between capital misallocation and growth. Absent externalities, market frictions worsen capital misallocation and hinder growth. When brokers are perfect monopolists, vanishing search frictions eliminate capital misallocation but leave growth inefficiently low. With learning-by-doing externalities, removing market frictions eradicates capital misallocation but may reduce both growth and welfare. With entry, higher dealer's bargaining power can reduce misallocation and growth.
Inflation and Unemployment in the Long Run Revisited (Joint with Zach Bethune, Michael Choi, and Sebastien Lotz)
We construct a continuous-time, monetary model with frictional goods and labor markets to revisit the long-run relationship between inflation and unemployment. By endogenizing the value of consumers' outside options and market power in accordance with standard consumer search theory, we generate novel predictions for the slope of the long-run Phillips curve, optimal monetary policy, and outcomes at the frictionless limit. The relationship between inflation and unemployment is non-monotone and, at low inflation rates, an increase in inflation reduces unemployment. The Friedman rule is suboptimal when firms' average bargaining power across markets is low. Markups and markdowns vanish as frictions disappear.