 Volatility and growth: Credit constraints and the composition of investmentPhilippe Aghion, George-Marios Angeletos, Abhijit Banerjee and Kalina Manova Scholarly Articles from Harvard University Department of Economics Abstract: This paper examines how uncertainty and credit constraints affect 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 effect 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 effect 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 model’s key predictions. Date: 2010 Published in Journal of Monetary Economics Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:12490636 Access Statistics for this paper More papers in Scholarly Articles from Harvard University Department of Economics Contact information at EDIRC. |
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