Costly Adjustment And Limited Borrowing

This paper demonstrates that time-dependent reallocation costs may play an important role in explaining the welfare costs of credit rationing in the presence of adverse real shocks. While there is no way to escape the need for structural adjustment to real shocks, the desired speed of adjustment is determined’ by the nature of the reallocation costs. Whenever the realocation costs are negatively related to the planning time that has been available before the movements of factors, there is an important role for credit assistance in reducing the resources lost in the reallocation process. [F41].