R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles
Journal of Macroeconomics, 2019, vol. 59, issue C, 299-324
Recent evidence suggests that credit booms and asset price bubbles may undermine economic growth even as they occur, regardless of whether a crisis follows, by crowding out investment in more productive, R&D-intensive industries. This paper incorporates Schumpeterian endogenous growth into a DSGE model with credit-constrained entrepreneurs to show how shocks affecting firms’ access to credit can generate boom-bust cycles featuring large fluctuations in land prices, consumption, and investment. During the expansion, rising land prices tend to crowd out capital and (especially) R&D investment: over the medium term, this results in a slowdown in the rate of creation of new (innovative) firms. Moreover, higher initial loan-to-value ratios tend to be associated with larger macroeconomic fluctuations. A counter-cyclical LTV ratio targeting credit growth has relevant stabilization effects but brings about small gains in terms of long-run consumption levels, and thus of welfare.
Keywords: Schumpeterian growth; Financial frictions; Land prices; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 O30 O40 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:59:y:2019:i:c:p:299-324
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