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.
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Citation
Bianchi, F and H Kung (eds) (2014), “DP10291 Growth, Slowdowns, and Recoveries”, CEPR Press Discussion Paper No. 10291. https://cepr.org/publications/dp10291
