Financial Frictions , Capital Misallocation , and Input-Output Linkages

I study how input-output linkages amplify the aggregate impact of sectoral financial distortions in a dynamic general equilibrium model with endogenous capital wedges. The aggregate impact of a shock can be decomposed into weighted productivity changes and changes in allocative efficiency. A systematic uncertainty shock induces heterogenous responses in sectoral capital wedges , reducing allocative efficiency and aggregate total factor productivity ( TFP ) . However , idiosyncratic sectoral uncertainty shocks may improve allocative efficiency and raise TFP. I then calibrate the model to US data. The network amplification magnitude on aggregate TFP ranges from 1.58 to 1.7. ( JEL E22, E23, E25, E32, E44, G20, G30 )