R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles
Claudio Battiati ()
No 48, Bank of Lithuania Working Paper Series from Bank of Lithuania
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: in the long run, this results in lower productivity levels, which in turn implies lower levels of aggregate output and consumption. 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)
Pages: 41 pages
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro and nep-mac
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Journal Article: R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:lie:wpaper:48
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