Growth, slowdowns, and recoveries

Bianchi, F, Kung, H and Morales, G (2019) Growth, slowdowns, and recoveries. Journal of Monetary Economics, 101. pp. 47-63. ISSN 0304-3932

Abstract

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.