by Robert E. Hall
Hoover Institution and Department of Economics, Stanford University
National Bureau of Economic Research
A comprehensive measure of financial friction is the difference
between the return businesses earn from capital - plant
and equipment - and the market cost of capital. The latter is
the amount that investors earn from holding financial claims.
I measure this friction as the difference between the marginal
product of capital adjusted for capital gains and losses on that
capital and the short-term interest rate. The friction measured
in that way rose to an unprecedented level after the financial
crisis that began in late 2008 and remained high four
years later. Macro models show that overall economic activity
is seriously adversely affected by such a large widening of
JEL Codes: E3, E5, G11.
Full article (PDF, 9 pages 788 kb)