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Volatility and growth: Credit constraints and the composition of investment

  • Aghion, Philippe
  • Angeletos, George-Marios
  • Banerjee, Abhijit
  • Manova, Kalina

This paper examines how uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth. We develop a model where ï¬rms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity growth. Because it takes longer to complete, long-term investment has a relatively less cyclical return; but it also has a higher liquidity risk. The ï¬rst effect ensures that the share of long-term investment to total investment is countercyclical when ï¬nancial markets are perfect; the second implies that this share may turn procyclical when ï¬rms face tight credit constraints. The contribution of the paper is thus to identify a novel propagation mechanism: through its effect on the cyclical composition of investment, tighter credit can lead to both higher volatility and lower mean growth. Evidence from a panel of countries provides support for the model’s key predictions.

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File URL: http://dash.harvard.edu/bitstream/handle/1/12490636/Volatility%20and%20Growth%20-%20Credit%20Constraints%20and%20Productivity-Enhancing%20Investment%20.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 12490636.

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Date of creation: 2010
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Publication status: Published in Journal of Monetary Economics
Handle: RePEc:hrv:faseco:12490636
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Web page: http://www.economics.harvard.edu/

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  1. Philippe Aghion & Philippe Askenazy & Nicolas Berman & Gilbert Cette & Laurent Eymard, 2008. "Credit constraints and the cyclicality of R&D investment: Evidence from France," PSE Working Papers halshs-00586744, HAL.
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  8. Aghion, Philippe & Askenazy, Philippe & Berman, Nicolas & Cette, Gilbert & Eymard, Laurent, 2012. "Credit Constraints and the Cyclicality of R&D Investment: Evidence from France," Scholarly Articles 12490632, Harvard University Department of Economics.
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  11. Walde, Klaus & Woitek, Ulrich, 2004. "R&D expenditure in G7 countries and the implications for endogenous fluctuations and growth," Economics Letters, Elsevier, vol. 82(1), pages 91-97, January.
  12. Aghion, Philippe & Saint-Paul, Gilles, 1998. "VIRTUES OF BAD TIMES Interaction Between Productivity Growth and Economic Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 322-344, September.
  13. Jones,L.E. & Manuelli,R.E. & Stacchetti,E., 1999. "Technology (and policy) shocks in models of endogenous growth," Working papers 9, Wisconsin Madison - Social Systems.
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  28. Gadi Barlevy, 2004. "On the Timing of Innovation in Stochastic Schumpeterian Growth Models," NBER Working Papers 10741, National Bureau of Economic Research, Inc.
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