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Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment / Philippe Aghion, George-Marios Angeletos, Abhijit Banerjee, Kalina Manova.
- Format:
- Book
- Author/Creator:
- Aghion, Philippe.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w11349.
- NBER working paper series no. w11349
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Volatility and Growth
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2005.
- Summary:
- We examine how credit constraints affect the cyclical behavior of productivity-enhancing investment and thereby volatility and growth. We first develop a simple growth model where firms engage in two types of investment: a short-term one and a long-term productivity-enhancing one. Because it takes longer to complete, long-term investment has a relatively less procyclical return but also a higher liquidity risk. Under complete financial markets, long-term investment is countercyclical, thus mitigating volatility. But when firms face tight credit constraints, long-term investment turns procyclical, thus amplifying volatility. Tighter credit therefore leads to both higher aggregate volatility and lower mean growth for a given total investment rate. We next confront the model with a panel of countries over the period 1960-2000 and find that a lower degree of financial development predicts a higher sensitivity of both the composition of investment and mean growth to exogenous shocks, as well as a stronger negative effect of volatility on growth.
- Notes:
- Print version record
- May 2005.
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