Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment

Aghion, Philippe; Angeletos, George-Marios; Banerjee, Abhijit; Manova, Kalina

doi:10.2139/ssrn.719772

Cited by 58 publications

(30 citation statements)

References 31 publications

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“…Looking at individual events, it could be used, for example, to analyze the uncertainty impact of trade reforms, major deregulations, tax changes, or political elections. There are of course many other linked recent strands of literature, including work on growth and volatility such as Ramey and Ramey (1995) and Aghion, Angeletos, Banerjee, and Manova (2005), on investment and uncertainty such as Leahy and Whited (1996) and Bloom, Bond, and Van Reenen (2007), on the business-cycle and uncertainty such as Barlevy (2004) and Gilchrist and Williams (2005), on policy uncertainty such as Adda and Cooper (2000), and on income and consumption uncertainty such as Meghir and Pistaferri (2004). 6 Bernanke developed an example of uncertainty in an oil cartel for capital investment, while Hassler solved a model with time-varying uncertainty and fixed adjustment costs.…”

Section: Introductionmentioning

confidence: 99%

The Impact of Uncertainty Shocks

2009

Econometrica

4,077

587

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Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock, and the 9/11 terrorist attacks. This paper offers a structural framework to analyze the impact of these uncertainty shocks. I build a model with a time-varying second moment, which is numerically solved and estimated using firm-level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment, and productivity. Thus, uncertainty shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to vector autoregression estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital adjustment costs (both convex and nonconvex). Ignoring capital adjustment costs is shown to lead to substantial bias, while ignoring labor adjustment costs does not. Copyright 2009 The Econometric Society.

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Section: Introductionmentioning

confidence: 99%

The Impact of Uncertainty Shocks

2009

Econometrica

4,077

587

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“…However, this is only true to the extent that firms are not credit constrained. As emphasized by Aghion et al (2010), henceforth AABM, things become quite different when credit market imperfections prevent firms from innovating and reorganizing in recessions. In particular, suppose that firms can choose between short‐run capital investment and long‐term R&D investment, that innovating requires that firms survive short‐run liquidity shocks, and that to cover liquidity costs firms can rely only on their short‐run earnings plus borrowing.…”

Section: Introductionmentioning

confidence: 99%

CREDIT CONSTRAINTS AND THE CYCLICALITY OF R&D INVESTMENT: EVIDENCE FROM FRANCE

Aghion

Askenazy

Berman

et al. 2012

Journal of the European Economic Association

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451

248

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We use a French firm-level panel data set over the period 1993-2004 to analyze the relationship between credit constraints and firms' R&D behavior over the business cycle. Our main results can be summarized as follows: (i) the share of R&D investment over total investment is countercyclical without credit constraints, but it becomes more procyclical as firms face tighter credit constraints; (ii) the result is magnified for firms in sectors that depend more heavily upon external finance; (iii) in more credit constrained firms, R&D investment share plummets during recessions but does not increase proportionally during upturns; (iv) average R&D investment and productivity growth are more negatively correlated with sales volatility in more credit constrained firms.JEL classification: E22, E32, O16, O30, O32.

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“…Her theory also claims that the Schumpeterian virtue of bad times holds only if the marginal opportunity cost of productivity-enhancing investments dominates the marginal expected return. Aghion et al (2005) and Aghion et al (2010) also provide empirical support for their model. Their analysis from a panel of twenty-one Organization for Economic Cooperation and Development (OECD) countries shows that long-term growthenhancing investments respond less to positive exogenous shocks in countries with more developed financial sectors.…”

Section: Literaturementioning

confidence: 74%

“…The seminal model of Aghion et al (2005) and Aghion et al (2010) argues that in the absence of credit constraints, investments that enhance long-term growth behave in a countercyclical manner, contrary to short-term investments. Aghion Downloaded by [New York University] et al (2010), however, claim that given credit constraints, long-term investments become procyclical.…”

Section: Literaturementioning

confidence: 99%

“…Aghion Downloaded by [New York University] et al (2010), however, claim that given credit constraints, long-term investments become procyclical. The model of Aghion et al (2005Aghion et al ( , 2010 identifies a propagating mechanism that credit constraints have on the cyclical composition of investment. In particular, there is a wedge that reflects the probability of failure determined by the allocation of investments between the short and long runs.…”

Section: Literaturementioning

confidence: 99%

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R&D, Credit Constraints, and Demand Fluctuations

Männasoo

Meriküll

2014

Eastern European Economics

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The opportunity-cost approach, suggesting a countervailing cyclical effect between research and development (R&D) and short-term investments, is the subject of theoretical and empirical debate. Our contribution provides comparative firm-level evidence for the effect of demand fluctuations and credit constraints on firms' R&D. We use microdata from ten new EU member states drawn from the Business Environment and Enterprise Performance Survey conducted by the European Bank for Research and Development and the World Bank. The results indicate that, first, R&D is countercyclical, with more R&D gained in recession than is lost in booms and, second, countries with higher income levels have less countercyclical R&D. The expected-return effect gains importance over the opportunity-cost effect in countries with higher income levels.Research investigating the impact of volatility on growth has moved to the forefront in the research agenda. Theories on endogenous growth stress the importance of research and development (R&D) and knowledge creation for innovation and longterm sustainable growth. 1 The Schumpeterian cleansing mechanism, or the "virtue of bad times," suggests that recessions reduce inefficiencies and force firms to focus Kadri Männasoo is a professor of statistics at Tallinn University of Technology. Jaanika Meriküll is a senior economist at Eesti Pank and a senior researcher at the University of Tartu.

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Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment

Cited by 58 publications

References 31 publications

The Impact of Uncertainty Shocks

The Impact of Uncertainty Shocks

CREDIT CONSTRAINTS AND THE CYCLICALITY OF R&D INVESTMENT: EVIDENCE FROM FRANCE

R&D, Credit Constraints, and Demand Fluctuations

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