Liquidity, Innovation, and Endogenous Growth

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 financing constraints lead firms to decrease production but may spur investment in innovation (R&D). We characterize which firms should substitute production for innovation in the face of constraints and thus display a "gambling" type of behavior. We embed our firm dynamics into a model of endogenous growth and show that financing frictions have offsetting effects on economic growth.

Keywords: innovation, cash management, financial constraints, endogenous growth

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

Suggested Citation: Suggested Citation

Malamud, Semyon and Zucchi, Francesca, Liquidity, Innovation, and Endogenous Growth (June 17, 2016). ECB Working Paper No. 1919, Available at SSRN: https://ssrn.com/abstract=2797359 or http://dx.doi.org/10.2139/ssrn.2797359

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

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

Francesca Zucchi

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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Liquidity, Innovation, and Endogenous Growth

Semyon Malamud

Francesca Zucchi