Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment

By Philippe Aghion, George-Marios Angeletos, Abhijit Banerjee, Kalina B. Manova. 2005

369 citations recorded by the source corpus.

We examine how credit constraints affect the cyclical behavior of productivity-enhancing investment and thereby volatility and growth. We first develop a simple growth model where firms engage in two types of investment: a short-term one and a long-term productivity-enhancing one. Because it takes longer to complete, long-term investment has a relatively less procyclical return but also a higher liquidity risk. Under complete financial markets, long-term investment is countercyclical, thus mitigating volatility. But when firms face tight credit constraints, long-term investment turns procyclical, thus amplifying volatility. Tighter credit therefore leads to both higher aggregate volatility and lower mean growth for a given total investment rate. We next confront the model with a panel of countries over the period 1960-2000 and find that a lower degree of financial development predicts a higher sensitivity of both the composition of investment and mean growth to exogenous shocks, as well as a stronger negative effect of volatility on growth.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/44e716cad3d9f8164341d255c329275268842795

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Citations in the corpus

The Impact of Uncertainty Shocks (2007, background): “There are of course many other linked recent strands of literature, including work on growth and volatility such as Ramey and Ramey (1995) and Aghion et al. (2005), on investment and uncertainty such as Leahy and Whited (1996) and Bloom, Bond and Van Reenen (2007), on the business-cycle and…”
Cyclical Fiscal Policy, Credit Constraints, and Industry Growth (2014, background): “As a result, standard cross-country panel regression cannot be used to assess the e¤ect of the cyclical pattern of scal policy on growth in as much as the former is perfectly collinear to the xed e¤ect that is traditionally introduced to control for unobserved cross-country heterogeneity.(4) Secon”
The long-run volatility puzzle of the real exchange rate (2006, background): “…for instance, Hausmann and Gavin, 1996; Easterly et al., 2001; Prasad et al., 2004) and that high volatility is correlated with GDP growth (Ramey and Ramey, 1995; Aghion et al., 2005), we are not aware of any paper that documents difference in the long-run volatility of the real exchange rate.”
Disasters and Development: Natural Disasters, Credit Constraints and Economic Growth (2014, positive): “According to Aghion et al. (2005): “variation in the measure of credit within the 0 − 10% range is unlikely to be informative about the variation in the availability of funds” (p.17).”
Policy Volatility, Institutions, and Economic Growth (2013, background): “Finally, an endogenous growth model can also introduce general equilibrium effects of uncertainty on growth through investment, consumer behavior, and the labor supply, as in Aghion et al. (2005), Barlevy (2004), Jones et al. (2005), or de Hek and Roy (2001).”
Government Size, Composition, Volatility and Economic Growth (2008, neutral): “For example, Alesina and Bayoumi (1996) show that fiscal policy restrictions tend to have a negligible effect on business cycles, and they argue that the positive and negative effects discussed above cancel each other out.”
On the Cyclicality of Research and Development (2007, background): “It will suffice to show that any solution ξ∗ which solves (5.8) lies in the unit interval (0, 1 ), since this implies”
Financial factors and the margins of trade: Evidence from cross-country firm-level data (2010, background): “3See among many others Beck (2002), Aghion et al. (2005), Manova (2005).”
Does access to credit improve productivity ? Evidence from Bulgarian firms (2006, positive): “…and transaction costs, in particular making the longer-gestation, higher-return projects more attractive (see, for example, Levine (1991) and Bencivenga et al. (1995)) and facilitating long-run, productivity-enhancing investment, increasing growth and reducing volatility (see Aghion et al. (2005)).”
Remittances, Financial Market Development, and Economic Growth: The Case of Latin America and the Caribbean (2009, background): “…extensive empirical literature in financial economics that argues that the expansion and deepening of the financial system leads to faster economic growth (Beck et al., 2000a; Aghion et al., 2005; Levine, 2006) and to higher investment (Rajan and Zingales, 1998; Demirgüç-Kunt and Maksimovic, 1998).”
Science, Technology and Innovation for Economic Growth: Linking Policy Research and Practice in "STIG Systems" (2008, positive): “More recently, Aghion et al. (2005b), have decomposed education spending into “lower brow” and “higher brow” education, and shown that growth in countries or US states that are closer to the technological frontier (defined by relative productivity standings) benefits more from advanced…”
Appropriate growth policy: a unifying framework (2006, methodology): “subject to the production function (1), the law of motion ( 3 ), and an individual version of the”
The impact of financial constraints on firm survival and growth (2007, background): “It has recently enjoyed renewed interest, as papers by Aghion et al. (2005), Aghion, Askenazy, Berman, Cette and Eymard (2007), and Aghion, Fally and Scarpetta (2007) testify.”
Credit Constraints and the Cyclicality of R&D Investment: Evidence from France (2012, background): “However, as emphasized by Aghion et al. (2005), henceforth AABM, things become quite diﬀerent when credit market imperfections prevent ﬁrms from innovating and reorganizing in recessions.”