Working Paper: NBER ID: w9034
Authors: Urban Jermann; Vincenzo Quadrini
Abstract: Together with a sense of entering a New Economy, the US experienced in the second half of the 1990s an economic expansion, a stock market boom, a financing boom for new firms and productivity gains. In this paper, we propose an interpretation of these events within a general equilibrium model with financial frictions and decreasing returns to scale in production. We show that the mere prospect of high future productivity growth can generate sizable gains in current productivity, as well as the other above mentioned events.
Keywords: No keywords provided
JEL Codes: E23; G14; G32; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the prospect of future productivity growth (O49) | Increase in the market value of firms (G32) |
| Increase in the market value of firms (G32) | Overcoming financing constraints for new firms (M13) |
| Overcoming financing constraints for new firms (M13) | Higher initial capital investments (G31) |
| Higher initial capital investments (G31) | Higher employment levels (J23) |
| Higher employment levels (J23) | Increase in labor demand (J23) |
| Increase in labor demand (J23) | Increase in wage rates (J38) |
| Increase in wage rates (J38) | Adjustment of production plans of existing firms (D25) |
| Adjustment of production plans of existing firms (D25) | Reallocation of labor from older, larger firms to newer, smaller firms (L26) |
| Reallocation of labor from older, larger firms to newer, smaller firms (L26) | More concentrated size distribution of firms (L25) |
| More concentrated size distribution of firms (L25) | Higher aggregate productivity of labor (O49) |
| Reallocation effect + Capital deepening (O49) | Total productivity gain (O49) |