Financial shocks to banks, R&D investment, and recessions

Ryoji Ohdoi

Macroeconomic Dynamics, 2024, vol. 28, issue 5, 999-1022

Abstract: In some classes of macroeconomic models with financial frictions, an adverse financial shock successfully explains a decrease in real activity but simultaneously induces a stock price boom. The latter theoretical result is not consistent with data from actual financial crises. This study aims to provide a theoretical explanation for both prolonged recessions and stock price declines. I develop a simple macroeconomic model featuring a banking sector, financial frictions, and R&D-based endogenous growth. Both the analytical and numerical investigations show that endogenous R&D investment and a shock hindering banks’ financial intermediary function can be key to generating both a prolonged recession and a drop in firms’ stock prices.

Date: 2024
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Working Paper: Financial shocks to banks, R&D investment, and recessions (2023)
Working Paper: Financial Shocks to Banks, R&D Investment, and Recessions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:28:y:2024:i:5:p:999-1022_1

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