Volatility & growth
Subtitle: credit constraints and productivity-- enhancing investment
By: [by] Philippe Aghion ... [et al.].
Contributors: Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 05-15; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 05-15.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Number of pages: 24
Subjects: Econometric models; Investments
Other titles: Volatility and growth :
Description: We examine how credit constraints affect the cyclical behavior of productivity-enhancing investment and thereby volatility and growth. We first develop a simple growth model where firms engage in two types of investment: a short-term one and a long-term productivity-enhancing one. Because it takes longer to complete, long-term investment has a relatively less procyclical return but also a higher liquidity risk. Under complete financial markets, long-term investment is countercyclical, thus mitigating volatility. But when firms face tight credit constraints, long-term investment turns procyclical, thus amplifying volatility. Tighter credit therefore leads to both higher aggregate volatility and lower mean growth for a given total investment rate. We next confront the model with a panel of countries over the period 1960-2000 and find that a lower degree of financial development predicts a higher sensitivity of both the composition of investment and mean growth to exogenous shocks, as well as a stronger negative effect of volatility on growth. Keywords: Growth, fluctuations, business cycle, credit constraints, amplification, R&D. JEL Classifications: E22, E32, O16, O30, O41, O57.
Notes: "April 30, 2005."

Includes bibliographical references (p. 21-24).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.