Working Paper: NBER ID: w20725
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: C11; E3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| equity financing shock (G32) | productivity growth (O49) |
| debt financing shock (G32) | economic growth (O49) |
| equity financing shock (G32) | R&D investment (O32) |
| debt financing shock (G32) | physical investment (G31) |
| 2001 recession equity financing shock (F65) | long-lasting adverse effect on knowledge accumulation (D29) |
| long-lasting adverse effect on knowledge accumulation (D29) | trend growth (O41) |
| decline in R&D investment during 2001 recession (O32) | trend growth (O41) |
| 2008 recession (F65) | long-term growth prospects (E66) |