Liquidity, Innovation, and Endogenous Growth

62 Pages Posted: 29 Sep 2015

See all articles by Semyon Malamud

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Francesca Zucchi

Federal Reserve Board

Multiple version iconThere are 3 versions of this paper

Date Written: September 2015


We study optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that liquidity constraints unambiguously lead firms to decrease their production rate but, surprisingly, may spur investment in innovation (R&D). Using the model, we characterize which firms substitute production for innovation when constrained and thus display a non-monotonic relation between cash reserves and R&D. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have an ambiguous effect on economic growth.

Keywords: Cash management, Creative destruction, Endogenous growth, Financial constraints, Innovation

JEL Classification: D21, G31, G32, G35, L11

Suggested Citation

Malamud, Semyon and Zucchi, Francesca, Liquidity, Innovation, and Endogenous Growth (September 2015). CEPR Discussion Paper No. DP10840, Available at SSRN:

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Francesca Zucchi

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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