Volatility and Growth: Credit Constraints and the Composition of Investment
Name
AABM-final-web-Volatility.pdf
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1.03 MB
Format
Adobe PDF
Checksum (MD5)
4514859b7928c188bb8c4e8d38dd1de5
Author(s)
Aghion, Philippe
Angeletos, George-Marios
Banerjee, Abhijit
Manova, Kalina
Date Issued
February 2010
Journal
Journal of Monetary Economics
Publisher
Elsevier
Citation
Aghion, Philippe et al. “Volatility and growth: Credit constraints and the composition of investment.” Journal of Monetary Economics In Press, Accepted Manuscript: n. pag.
Version
Author's final manuscript
Abstract
How does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth? This paper addresses this question within a model where firms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity growth. Because it takes longer to complete, long-term investment has a relatively less cyclical return; but it also has a higher liquidity risk. The first effect ensures that the share of long-term investment to total investment is countercyclical when financial markets are perfect; the second implies that this share may turn procyclical when firms face tight credit constraints. A novel propagation mechanism thus emerges: through its effect on the cyclical composition of investment, tighter credit can lead to both higher volatility and lower mean growth. Evidence from a panel of countries provides support for the model's key predictions.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
http://dx.doi.org/10.1016/j.jmoneco.2010.02.005
