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R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles

Claudio Battiati ()
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Claudio Battiati: LUISS University, School of European Political Economy

No 48, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: 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)
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro and nep-mac
Date: 2017-12-11
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