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Endogenous Growth, Firm Heterogeneity and the Long-run Impact of Financial Crises

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  • Tom Schmitz

    (Università Bocconi)

Abstract

I propose a new endogenous growth model with heterogeneous firms and aggregate shocks. The model shows that firm heterogeneity generates several new amplification and persistence mechanisms for a transitory shock to financing conditions. This shock imposes financing constraints, which force small and young innovating firms (with low retained earnings) to reduce their R&D, and therefore leads to R&D misallocation. Furthermore, it lowers entry and persistently reduces the mass of innovating firms. Thus, even as financing constraints disappear, aggregate R&D and innovation remain persistently depressed, as the remaining large firms can only imperfectly substitute for the R&D of the missing generation of young and small ones. Finally, lower R&D during and after the shock also limits the scope for incremental follow-up innovations. My model's main features are in line with developments in the Spanish manufacturing sector during the 2008-2013 economic and financial crisis.

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  • Tom Schmitz, 2016. "Endogenous Growth, Firm Heterogeneity and the Long-run Impact of Financial Crises," 2016 Meeting Papers 609, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:609
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    3. de Ridder, Maarten, 2016. "Investment in productivity and the long-run effect of financial crises on output," LSE Research Online Documents on Economics 86180, London School of Economics and Political Science, LSE Library.
    4. Bonciani, Dario & Gauthier, David & Kanngiesser, Derrick, 2021. "Slow recoveries, endogenous growth and macroprudential policy," Bank of England working papers 917, Bank of England.
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    6. Ambrocio, Gene & Juselius, Mikael, 2020. "Dealing with the costs of the COVID-19 pandemic – what are the fiscal options?," BoF Economics Review 2/2020, Bank of Finland.
    7. Oana Peia & Davide Romelli, 2019. "Did bank lending stifle innovation in Europe during the Great Recession?," Working Papers 201926, School of Economics, University College Dublin.
    8. Garcia-Lazaro, Aida & Mistak, Jakub & Gulcin Ozkan, F., 2021. "Supply chain networks, trade and the Brexit deal: a general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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