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Investment in Productivity and the Long-Run Effect of Financial Crises on Output

Listed author(s):
  • Maarten de Ridder

    ()

    (Centre for Macroeconomics (CFM)
    University of Cambridge)

This paper analyzes the channels through which financial crises exert long-term negative effects on output. Recent models suggest that a shortfall in productivity-enhancing investments temporarily slows technological progress, creating a gap between pre-crisis trend and actual GDP. This hypothesis is tested using a linked lender-borrower dataset on 519 U.S. corporations responsible for 54% of industrial research and development. Exploiting quasi-experimental variation in firm-level exposure to the 2008-9 financial crisis, I show that tight credit reduced investments in productivity-enhancement, and has significantly slowed down output growth between 2010 and 2015. A partial-equilibrium aggregation excercise suggests output would be 12% higher today if productivity-enhancing investments had grown at pre-crisis rates.

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File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2016/CFMDP2016-30-Paper.pdf
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Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1630.

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Length: 50 pages
Date of creation: Sep 2016
Handle: RePEc:cfm:wpaper:1630
Contact details of provider: Web page: http://www.centreformacroeconomics.ac.uk/

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