Financial Shocks and Endogenous Total Factor Productivity

This paper presents and estimates a dynamic stochastic general equilibrium model in which labor reallocations between production and organizational tasks and endogenous movements in measured TFP serve as an ampli…cation mechanism in business cycles. In our model, the organizational tasks are related to accumulation of organizational capital which enhances the …nancial relationships between …rms and …nancial intermediaries. Changes in organizational capital produce procyclical movements in measured TFP: during bad times when …nancial relationships are broken, …rms reallocate labor from regular production tasks to organizational tasks in order to rebuild …nancial relationships with lenders, and this results in a fall in measured TFP. We estimate the model with Japanese data using maximum likelihood method. Our quantitative analysis suggests that such movements in organizational capital and labor reallocations serve as an important mechanism to amplify the e¤ects of exogenous shocks on the measured TFP and the real economy. JEL Classi…cation: E13, E32