Open AccessThe High Sensitivity of Economic Activity to Financial Frictions *
Author(s) -
Hall Robert E.
Publication year - 2011
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/j.1468-0297.2011.02421.x
Subject(s) - renting , economics , capital (architecture) , finance , capital good , cost of capital , financial capital , financial crisis , monetary economics , labour economics , business , microeconomics , macroeconomics , market economy , human capital , public good , incentive , archaeology , political science , law , history
A financial friction is a wedge between the return received by providers of financial capital – ultimately, consumers – and the cost of capital paid by businesses and consumers who use capital. I study two frictions. One raises the rental cost of capital to firms and the other raises the rental cost of housing and durable goods to consumers. My focus is on the effects of financial frictions – I take the magnitudes of the frictions as given. Thus, my results complement an active recent literature that explains the intensification of financial frictions in a crisis. I find that financial frictions are powerful determinants of economic activity.