Volatility and Growth: Credit Constraints and the Composition of Investment
How does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth? This paper addresses this question within a model where firms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity...
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| Format: | Article |
| Language: | en_US |
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Elsevier
2010
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| Online Access: | http://hdl.handle.net/1721.1/52352 https://orcid.org/0000-0002-9269-5094 https://orcid.org/0000-0001-9923-6088 |
| _version_ | 1826198390603513856 |
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| author | Aghion, Philippe Angeletos, George-Marios Banerjee, Abhijit Manova, Kalina |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Aghion, Philippe Angeletos, George-Marios Banerjee, Abhijit Manova, Kalina |
| author_sort | Aghion, Philippe |
| collection | MIT |
| description | How does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth? This paper addresses this question within a model where firms 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 first effect ensures that the share of long-term investment to total investment is countercyclical when financial markets are perfect; the second implies that this share may turn procyclical when firms face tight credit constraints. A novel propagation mechanism thus emerges: 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. |
| first_indexed | 2024-09-23T11:04:07Z |
| format | Article |
| id | mit-1721.1/52352 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T11:04:07Z |
| publishDate | 2010 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | mit-1721.1/523522022-09-27T16:54:04Z Volatility and Growth: Credit Constraints and the Composition of Investment Aghion, Philippe Angeletos, George-Marios Banerjee, Abhijit Manova, Kalina Massachusetts Institute of Technology. Department of Economics Angeletos, George-Marios Angeletos, George-Marios Banerjee, Abhijit Angeletos, George-Marios How does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth? This paper addresses this question within a model where firms 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 first effect ensures that the share of long-term investment to total investment is countercyclical when financial markets are perfect; the second implies that this share may turn procyclical when firms face tight credit constraints. A novel propagation mechanism thus emerges: 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. 2010-03-05T18:53:28Z 2010-03-05T18:53:28Z 2010-02 2010-02 Article http://purl.org/eprint/type/SubmittedJournalArticle 0304-3932 http://hdl.handle.net/1721.1/52352 Aghion, Philippe et al. “Volatility and growth: Credit constraints and the composition of investment.” Journal of Monetary Economics In Press, Accepted Manuscript: n. pag. https://orcid.org/0000-0002-9269-5094 https://orcid.org/0000-0001-9923-6088 en_US http://dx.doi.org/10.1016/j.jmoneco.2010.02.005 Journal of Monetary Economics Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/3.0/ application/pdf Elsevier George-Marios Angeletos |
| spellingShingle | Aghion, Philippe Angeletos, George-Marios Banerjee, Abhijit Manova, Kalina Volatility and Growth: Credit Constraints and the Composition of Investment |
| title | Volatility and Growth: Credit Constraints and the Composition of Investment |
| title_full | Volatility and Growth: Credit Constraints and the Composition of Investment |
| title_fullStr | Volatility and Growth: Credit Constraints and the Composition of Investment |
| title_full_unstemmed | Volatility and Growth: Credit Constraints and the Composition of Investment |
| title_short | Volatility and Growth: Credit Constraints and the Composition of Investment |
| title_sort | volatility and growth credit constraints and the composition of investment |
| url | http://hdl.handle.net/1721.1/52352 https://orcid.org/0000-0002-9269-5094 https://orcid.org/0000-0001-9923-6088 |
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