Volatility and growth: Credit constraints and the composition of investment
George-Marios Angeletos (),
Abhijit Banerjee and
Scholarly Articles from Harvard University Department of Economics
This paper examines how uncertainty and credit constraints aï¬€ect the cyclical composition of investment and thereby volatility and growth. We develop a model where ï¬ rms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity growth. Because it takes longer to complete, long-term investment has a relatively less cyclical return; but it also has a higher liquidity risk. The ï¬ rst eï¬€ect ensures that the share of long-term investment to total investment is countercyclical when ï¬ nancial markets are perfect; the second implies that this share may turn procyclical when ï¬ rms face tight credit constraints. The contribution of the paper is thus to identify a novel propagation mechanism: through its eï¬€ect on the cyclical composition of investment, tighter credit can lead to both higher volatility and lower mean growth. Evidence from a panel of countries provides support for the modelâ€™s key predictions.
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Published in Journal of Monetary Economics
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Journal Article: Volatility and growth: Credit constraints and the composition of investment (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:12490636
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