St Louis Fed paper observes high government reallocation costs

A St Louis Federal Reserve paper published on Tuesday shows the government's optimal response to negative sectoral shocks is subject to large capital reallocation costs.

Rodolfo Manuelli and Adrian Peralta-Alva, the paper's authors, study the role that frictions in reallocating resources play in determining the optimal response of the government to a drop in demand. The authors are interested in learning how frictions in goods and labour markets affect the nature and speed of reallocating