DP10291 Growth, Slowdowns, and Recoveries

Author(s): Francesco Bianchi, Howard Kung, Gonzalo Morales
Publication Date: December 2014
Date Revised: June 2018
Keyword(s): Bayesian methods, business cycles, endogenous growth, financial frictions
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10291

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.