We study the cyclical implications of credit market imperfections in a dynamic, stochastic general equilibrium model wherein firms face persistent shocks to both aggregate and individual productivity. In our model economy, optimal capital reallocation is distorted by two frictions. First,...

We study an economy where households face transactions costs of participating in the housing market. In response to these costs, households choose to buy and sell houses infrequently. This, in turn, implies that the value of the typical transaction is large relative to income. In this way our...