We develop a two-sector general-equilibrium model with capital accumulation and convex adjustment costs to analyze sectoral capital reallocation and asset pricing. Consumers weigh the diversification benefits of spreading investment across sectors against the productivity gains of concentrating capital in the more productive sector. We derive conditions under which sectoral capital reallocation shapes both sectoral and aggregate outcomes. Our framework highlights the importance of heterogeneity and capital liquidity—the ease of reallocating capital—in driving growth and asset prices, and uncovers a fundamental trade-off: while diversification enhances risk sharing, reallocation may dampen aggregate growth.
{"title":"Reallocating and Pricing Illiquid Capital: Two Productive Trees","authors":"Janice Eberly, Neng Wang","doi":"10.1111/iere.70027","DOIUrl":"https://doi.org/10.1111/iere.70027","url":null,"abstract":"<div>\u0000 \u0000 <p>We develop a two-sector general-equilibrium model with capital accumulation and convex adjustment costs to analyze sectoral capital reallocation and asset pricing. Consumers weigh the diversification benefits of spreading investment across sectors against the productivity gains of concentrating capital in the more productive sector. We derive conditions under which sectoral capital reallocation shapes both sectoral and aggregate outcomes. Our framework highlights the importance of heterogeneity and capital liquidity—the ease of reallocating capital—in driving growth and asset prices, and uncovers a fundamental trade-off: while diversification enhances risk sharing, reallocation may dampen aggregate growth.</p></div>","PeriodicalId":48302,"journal":{"name":"International Economic Review","volume":"66 5","pages":"1887-1907"},"PeriodicalIF":1.3,"publicationDate":"2025-10-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145695499","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This discussion of “Reallocating and Pricing Illiquid Capital: Two Productive Trees” by Janice Eberly and Neng Wanghighlights its tractable two-sector model with costly capital reallocation, which links diversification benefits, adjustment frictions, and asset pricing. I outline four promising directions for future research: quantifying the diversification–friction trade-off, exploring business cycle and asset pricing dynamics, examining growth under uncertainty, and connecting to the capital reallocation literature with state-dependent frictions. The model framework provides a clear and versatile framework that can guide both theoretical advances and empirical work on capital allocation, risk premia, and macro-financial dynamics.
{"title":"Discussion of “Reallocating and Pricing Illiquid Capital: Two Productive Trees”","authors":"Kai Li","doi":"10.1111/iere.70030","DOIUrl":"https://doi.org/10.1111/iere.70030","url":null,"abstract":"<div>\u0000 \u0000 <p>This discussion of “Reallocating and Pricing Illiquid Capital: Two Productive Trees” by Janice Eberly and Neng Wanghighlights its tractable two-sector model with costly capital reallocation, which links diversification benefits, adjustment frictions, and asset pricing. I outline four promising directions for future research: quantifying the diversification–friction trade-off, exploring business cycle and asset pricing dynamics, examining growth under uncertainty, and connecting to the capital reallocation literature with state-dependent frictions. The model framework provides a clear and versatile framework that can guide both theoretical advances and empirical work on capital allocation, risk premia, and macro-financial dynamics.</p></div>","PeriodicalId":48302,"journal":{"name":"International Economic Review","volume":"66 5","pages":"1909-1911"},"PeriodicalIF":1.3,"publicationDate":"2025-09-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145695325","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Comment on “Inflation and Debt Rollover Under Low Interest Rates”","authors":"Zhiwei Xu","doi":"10.1111/iere.70033","DOIUrl":"https://doi.org/10.1111/iere.70033","url":null,"abstract":"","PeriodicalId":48302,"journal":{"name":"International Economic Review","volume":"66 5","pages":"1809-1811"},"PeriodicalIF":1.3,"publicationDate":"2025-09-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145695323","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Discussion of A Macroeconomic Model of Structural Monetary Policy in China","authors":"Dun Jia","doi":"10.1111/iere.70032","DOIUrl":"https://doi.org/10.1111/iere.70032","url":null,"abstract":"","PeriodicalId":48302,"journal":{"name":"International Economic Review","volume":"66 5","pages":"1835-1837"},"PeriodicalIF":1.3,"publicationDate":"2025-09-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145695324","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the feedback loop between shortages and consumer stockpiling. The expectation of shortages induces consumers to stockpile, which amplifies the shortages they experience, which further encourages stockpiling. We show that, when aggregate supply is insufficient to meet aggregate demand and prices cannot adjust to clear the market, multiple equilibria exist which feature stockpiling to different degrees. Even when the fundamental supply shortfall is small, significant stockpiling can arise in equilibrium. Stockpiling reduces welfare, and this welfare loss is particularly severe in the transitional phase following the supply shock, during which consumers accumulate inventories.
{"title":"Stockpiling and Shortages","authors":"Tilman Klumpp, Xuejuan Su","doi":"10.1111/iere.70029","DOIUrl":"https://doi.org/10.1111/iere.70029","url":null,"abstract":"<p>We examine the feedback loop between shortages and consumer stockpiling. The expectation of shortages induces consumers to stockpile, which amplifies the shortages they experience, which further encourages stockpiling. We show that, when aggregate supply is insufficient to meet aggregate demand and prices cannot adjust to clear the market, multiple equilibria exist which feature stockpiling to different degrees. Even when the fundamental supply shortfall is small, significant stockpiling can arise in equilibrium. Stockpiling reduces welfare, and this welfare loss is particularly severe in the transitional phase following the supply shock, during which consumers accumulate inventories.</p>","PeriodicalId":48302,"journal":{"name":"International Economic Review","volume":"66 4","pages":"1693-1712"},"PeriodicalIF":1.3,"publicationDate":"2025-09-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/iere.70029","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145297598","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
<p>The paper, “Quantifying the Macroeconomic Impact of Credit Expansions,” tackles a central question in macroeconomics: are households or firms more important when credit conditions transmit to the real economy? The authors address this question with both empirical clarity and theoretical discipline. The work combines causal estimates from a quasi-natural experiment (US bank deregulation in the 1980s) with a rich heterogeneous-agent New Keynesian (HANK) model that incorporates both household- and firm-heterogeneity in a small open economy framework.</p><p>The household-side channel, one of the two engines for the boom after deregulation, operates through consumer demand following improved credit access. This channel plays a dominant role in the rise of consumption and an important role in the output boom in the first 5 years after deregulation. Firm-side effects dominate investment dynamics, and the effects from this second engine can explain around 71% of the cumulative effects on most variables in the 10-year horizon. The structure and calibration of the model are disciplined by local projections of empirical impulse responses to banking deregulation, and the quantitative match is strong. In sum, the paper offers important food for thought for macroeconomists working at the intersection of financial frictions and the real economy.</p><p>Notably, the paper leverages banking deregulation as a quasi-experimental setting to trace the behavioral responses of households and firms. The local-projection method provides an effective way to identify interest rate shocks and yields estimated impulse responses of macro variables. These responses are then used to discipline the model parameters, enabling the analysis to disentangle household- and firm-side effects through the structural framework. By observing which agents respond more strongly to changes in borrowing costs, the model provides insight into the relative <i>elasticities</i> across sectors or agents under varying financial conditions. In this light, the paper's framework goes beyond macrofinancial transmission and has implications for optimal stabilization policy and tax design. For example, in recent work of Bassetto and Cui (<span>2024</span>), we show (in a Ramsey taxation setting with financial frictions) that comparing input elasticities is key to deciding whether optimal policy should rely on capital subsidies that can ease financial frictions on investment, or capital taxation that can reduce quasi-rents arising from financial frictions. From this perspective, I find the paper's approach particularly appealing.</p><p>The paper presents a compelling argument that the prominence of the firm channel reflects the gradual adjustment of labor and output observed in the data. This reasoning is sound. However, households and firms may not experience changes in interest rates at the same pace, and unfortunately, we lack detailed data to capture these differences. Fortunately, the paper offers a
{"title":"Two Engines, One Boom: Disentangling Credit's Real Effects","authors":"Wei Cui","doi":"10.1111/iere.70034","DOIUrl":"https://doi.org/10.1111/iere.70034","url":null,"abstract":"<p>The paper, “Quantifying the Macroeconomic Impact of Credit Expansions,” tackles a central question in macroeconomics: are households or firms more important when credit conditions transmit to the real economy? The authors address this question with both empirical clarity and theoretical discipline. The work combines causal estimates from a quasi-natural experiment (US bank deregulation in the 1980s) with a rich heterogeneous-agent New Keynesian (HANK) model that incorporates both household- and firm-heterogeneity in a small open economy framework.</p><p>The household-side channel, one of the two engines for the boom after deregulation, operates through consumer demand following improved credit access. This channel plays a dominant role in the rise of consumption and an important role in the output boom in the first 5 years after deregulation. Firm-side effects dominate investment dynamics, and the effects from this second engine can explain around 71% of the cumulative effects on most variables in the 10-year horizon. The structure and calibration of the model are disciplined by local projections of empirical impulse responses to banking deregulation, and the quantitative match is strong. In sum, the paper offers important food for thought for macroeconomists working at the intersection of financial frictions and the real economy.</p><p>Notably, the paper leverages banking deregulation as a quasi-experimental setting to trace the behavioral responses of households and firms. The local-projection method provides an effective way to identify interest rate shocks and yields estimated impulse responses of macro variables. These responses are then used to discipline the model parameters, enabling the analysis to disentangle household- and firm-side effects through the structural framework. By observing which agents respond more strongly to changes in borrowing costs, the model provides insight into the relative <i>elasticities</i> across sectors or agents under varying financial conditions. In this light, the paper's framework goes beyond macrofinancial transmission and has implications for optimal stabilization policy and tax design. For example, in recent work of Bassetto and Cui (<span>2024</span>), we show (in a Ramsey taxation setting with financial frictions) that comparing input elasticities is key to deciding whether optimal policy should rely on capital subsidies that can ease financial frictions on investment, or capital taxation that can reduce quasi-rents arising from financial frictions. From this perspective, I find the paper's approach particularly appealing.</p><p>The paper presents a compelling argument that the prominence of the firm channel reflects the gradual adjustment of labor and output observed in the data. This reasoning is sound. However, households and firms may not experience changes in interest rates at the same pace, and unfortunately, we lack detailed data to capture these differences. Fortunately, the paper offers a","PeriodicalId":48302,"journal":{"name":"International Economic Review","volume":"66 5","pages":"1929-1931"},"PeriodicalIF":1.3,"publicationDate":"2025-09-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/iere.70034","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145695433","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the role of international trade in cross-country financial shock transmission using an equilibrium business cycle model calibrated to the United States and Canada. Heterogeneous firms have differing needs for external finance and face occasionally binding collateral constraints hindering their investments, while input–output linkages drive trade in final goods and intermediate inputs. Transmission of a U.S. financial shock recession into Canada's economy is qualitatively different from productivity shock transmission and asymmetric. We trace the first result to a unique investment channel operating through persistent trade balance adjustments and the second to differences in the two countries' exposure to trade.
{"title":"Productive Misallocation and International Transmission of Credit Shocks","authors":"Yuko Imura, Julia K. Thomas","doi":"10.1111/iere.70005","DOIUrl":"https://doi.org/10.1111/iere.70005","url":null,"abstract":"<p>We study the role of international trade in cross-country financial shock transmission using an equilibrium business cycle model calibrated to the United States and Canada. Heterogeneous firms have differing needs for external finance and face occasionally binding collateral constraints hindering their investments, while input–output linkages drive trade in final goods and intermediate inputs. Transmission of a U.S. financial shock recession into Canada's economy is qualitatively different from productivity shock transmission and asymmetric. We trace the first result to a unique investment channel operating through persistent trade balance adjustments and the second to differences in the two countries' exposure to trade.</p>","PeriodicalId":48302,"journal":{"name":"International Economic Review","volume":"66 4","pages":"1395-1423"},"PeriodicalIF":1.3,"publicationDate":"2025-09-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/iere.70005","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145297254","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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