Financial Intermediation and Capital Reallocation

We develop a general equilibrium framework to quantify the importance of interme- diated capital reallocation in aecting macroeconomic uctuations and asset returns. In our model, nancial intermediaries intermediate capital reallocation between low productivity rms with excess capital and high productivity rms who need credit. Because lending contracts cannot be perfectly enforced, capital misallocation lowers aggregate productivity when intermediaries are nancially constrained. As a result, shocks originated from the nancial sector manifest themselves as uctuations in total factor productivity and account for most of the business cycle variations in macroeco- nomic quantities. Our model produces a pro-cyclical capital reallocation and is consis- tent with the stylized fact that the volatilities of productivity are counter-cyclical at both the rm and the aggregate level. On the asset pricing side, our model matches well moments of interest rate spreads in the data and successfully generates a high and counter-cyclical equity premium.