On the Virtue of Bad Times: An Analysis of the Interaction between Economic Fluctuations and Productivity Growth

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On the Virtue of Bad Times: An Analysis of the Interaction between Economic Fluctuations and Productivity Growth

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Aghion, Philippe
Saint-Paul, Gilles

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Gilles Saint-Paul

Abstract

This paper develops a simple model, which shows how economic fluctuations can stimulate growth. It is shown that firms tend to invest more in productivity growth during recessions, since the opportunity cost (in terms of forgone profits) of investing capital or labour resources in technological (or managerial) improvements is lower during recessions. It is then established that the average growth rate of the economy increases with the amplitude of the fluctuations and also with their frequency, provided that the initial average duration of recession phases is sufficiently low compared with that of the expansion phases. Finally, the main results of the paper are shown to be consistent with the empirical evidence recently produced by Davis-Haltiwanger (1990) or Blanchard-Diamond (1990) concerning the cyclical behaviour of job re-allocation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 578.

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Date of creation: Sep 1991
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Handle: RePEc:cpr:ceprdp:578

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Paper
- Aghion, P. & Saint-Paul, G., 1991. "On The Virtue of Bad Times: An Analysis of the Interaction Between Economic Fluctuations and Productivity Growth," DELTA Working Papers 91-23, DELTA (Ecole normale supérieure).

Find related papers by JEL classification:
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing

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