Volatility and growth: Credit constraints and the composition of investment

By Philippe Aghion, George-Marios Angeletos, Abhijit Banerjee, Kalina B. Manova. 2010

675 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/251296434928f9f0931b94d56f42e7d0c4e3e5c8

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Citations in the corpus

Credit Constraints, Heterogeneous Firms and International Trade (2013, positive): “Appendix A shows how this a¤ects the maximization problem (1).”
Internal financial constraints and firm productivity in China: Do liquidity and export behavior make a difference? (2013, positive): “Aghion et al. (2007) show that perfect financial markets can encourage more long-term productivity-enhancing investments by reducing the liquidity risk connected to the investments.”
Cyclical Fiscal Policy, Credit Constraints, and Industry Growth (2014, positive): “The first part of the paper builds on Aghion et al (2010) to sketch the theoretical16 argument that rationalizes our empirical strategy and predictions.”
Disasters Risk and Business Cycles (2012, neutral): “W (K; z; p) = max C;I;N ( C (1 N)(1) 1 + Ep0;z0;x0W (K 0; z0; p0) 1 1 1 1 ) ; (3)”
Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles (2010, background): “…negative links between macroeconomic volatility, R&D investment, and long-run economic growth in presence of financial market imperfections, see also Aghion et al. (2008, 2010). and brings it to the ‘‘good’’ (high growth) one, which also our benchmark scenario happens to belong (cf. Table 8 and…”
Reassessing the Impact of Finance on Growth (2012, neutral): “…profile of entrepreneurs’ projects; Holmström and Tirole (1998), who examine how financial intermediaries can help save on liquidity hoarding; and Aghion et al (2010), who show how financial development helps reduce the growth cost of economic fluctuations. extent of the overinvestment that…”
Financial Frictions and the Great Productivity Slowdown (2017, positive): “More closely related to our work are papers by Aghion et al. (2010), who show theoretically that credit constraints can lead firms to cut R&D spending—and long-term illiquid investments more broadly—during recessions, as well as by Aghion et al. (2012), who find supportive empirical evidence using F”
Law, Stock Markets, and Innovation (2013, background): “, Aghion et al. (2012) and Pienknagura (2010)) do not emphasize the special importance of stock markets and legal investor protections for R&D.”
Economic policy uncertainty and firm investment: evidence from the U.S. market (2019, background): “The finding confirms the theoretical models (e.g. Aghion et al. 2010; Converse 2012), but few empirical works have been applied.”
Micro and macro policies in the Keynes+Schumpeter evolutionary models (2016, neutral): “Such a vicious circle of low R&D, low economic growth and high volatility is in line with previous accounts by Stiglitz (1994) and Aghion et al. (2010) and Aghion et al. (2008), in particular in the presence of credit market imperfections (Aghion et al. 2014).”
Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems (2014, background): “Aghion et al. (2005) argue that the reason for the non-linearity of the finance-growth relationship might be that financial development helps catch up to the productivity frontier, but has limited or no growth effect for countries that are close or at the frontier. One reason for these non-lineariti”
Revisiting the Link between Finance and Macroeconomic Volatility (2013, positive): “To test that our results are robust to different external shocks, we also consider countryspecific commodity price shocks, using the approach outlined in Aghion et al. (2010).”
Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence (2019, methodology): “They then convert the technology into use by employing (11)Other approaches to motivating procyclical R&D, include introducing financial frictions (Aghion et al. (2010)), short term biases of innovators (Barlevy (2007)), or capital services in the R&D technology function (Comin and Gertler (2006)).”