Volatility and Growth: Credit Constraints and the Composition of Investment
Author(s)Aghion, Philippe; Angeletos, George-Marios; Banerjee, Abhijit; Manova, Kalina
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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.
DepartmentMassachusetts Institute of Technology. Department of Economics
Journal of Monetary Economics
Aghion, Philippe et al. “Volatility and growth: Credit constraints and the composition of investment.” Journal of Monetary Economics In Press, Accepted Manuscript: n. pag.
Author's final manuscript