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A Multi-industry Model of Growth with Financing Constraints

  • Roberto Samaniego

    (George Washington University)

  • Anna Ilyina

    (International Monetary Fund)

We develop a general equilibrium multi-industry model in which firms use external funds to conduct productivity-enhancing R&D. Industries differ in terms of research costs, which lead them to different optimal research expenditures. In the model, more R&D-intensive industries require more external funding, and tend to grow relatively faster in more financially developed environments -- consistent with empirical evidence. As a result, industry composition and the level of financial development have joint implications for aggregate growth and for equilibrium patterns of structural change. Aggregate growth in a financially underdeveloped economy converges to that in a frictionless benchmark economy, so long as its fastest-growing industry is not financially constrained. We show that equilibrium industry dynamics in the model can be approximated using a differences-in-differences industry growth regression that links financial development to industry growth.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 467.

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Date of creation: 2009
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Handle: RePEc:red:sed009:467
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