DP578 On the Virtue of Bad Times: An Analysis of the Interaction between Economic Fluctuations and Productivity Growth

Author(s): Philippe Aghion, Gilles Saint-Paul
Publication Date: September 1991
Keyword(s): Expansions, Job Creation, Job Destruction, Productivity Growth, Productivity Shocks, Recessions
JEL(s): C68, D21, D50, D92
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=578

This paper develops a simple model, which shows how economic fluctuations can stimulate growth. It is shown that firms tend to invest more in productivity growth during recessions, since the opportunity cost (in terms of forgone profits) of investing capital or labour resources in technological (or managerial) improvements is lower during recessions. It is then established that the average growth rate of the economy increases with the amplitude of the fluctuations and also with their frequency, provided that the initial average duration of recession phases is sufficiently low compared with that of the expansion phases. Finally, the main results of the paper are shown to be consistent with the empirical evidence recently produced by Davis-Haltiwanger (1990) or Blanchard-Diamond (1990) concerning the cyclical behaviour of job re-allocation.