Working Paper: CEPR ID: DP10291
Authors: Francesco Bianchi; Howard Kung; Gonzalo Morales
Abstract: We construct and estimate an endogenous growth model with debt and equity financing frictions to understand the relation between business cycle fluctuations and long-term growth. The presence of spillover effects from R&D imply an endogenous relation between productivity growth and the state of the economy. A large contractionary shock to equity financing in the 2001 recession led to a persistent growth slowdown that was more severe than in the 2008 recession. Equity (debt) financing shocks are more important for explaining R&D (physical) investment. Therefore, these two financing shocks affect the economy over different horizons.
Keywords: endogenous growth; financial frictions; business cycles; Bayesian methods
JEL Codes: E32; E44; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt financing shocks (F65) | Macroeconomic variables (E19) |
| Equity financing shocks (G19) | R&D dynamics (O32) |
| Debt financing shocks (F65) | Physical investment (E22) |
| Contraction in equity financing (G32) | Decline in R&D investment (O39) |
| Liquidation values shocks (G33) | Negative impacts on investment and growth rates (F69) |
| Accommodative monetary and fiscal policies during the 2008 recession (E63) | Stabilization of R&D rates and technology utilization (O39) |
| Shock to equity financing during the 2001 recession (G32) | Persistent growth slowdown (O49) |
| Shock to equity financing during the 2001 recession (G32) | More severe growth slowdown than that observed in the 2008 recession (F69) |