Virtue of Bad Times and Financial Market Frictions

Min Ouyang ()

No 101103, Working Papers from University of California-Irvine, Department of Economics

Abstract: Schumpeter (1939) proposes that recessions have virtue in promoting growth-enhancing activities. However, this view is often at odds with data, as many innovative activities appear pro-cyclical. We revisit the "virtue of bad times" theoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovation's marginal opportunity cost dominates that of its marginal expected return; but binding financial constraints can hinder such virtue, preventing innovation from rising during recessions. Our theory is carried to an industry panel of production and innovation. Our evidence suggests that recessions indeed have potential virtue, but such virtue is hindered by financial-market frictions.

Keywords: Recessions; Growth; Financial-market frictions (search for similar items in EconPapers)
JEL-codes: E32 E44 O30 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:101103

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