Uncertainty-Induced Reallocations, Innovation, and Growth

Abstract

Focusing on both micro and aggregate U.S. data, we document the existence of a significant link between aggregate uncertainty, capital market valuations and reallocation of resources away from risky R&D-intensive capital. This link is important because a decrease in the aggregate share of R&D-oriented investments forecasts lower medium-term growth. We study a three-sector model in which one sector features relatively risky R&D-intensive capital essential to sustain growth, whereas the other sectors feature safer capital that is not innovation-intensive. Our model accounts for our empirical evidence as uncertainty shocks prompt sectoral reallocations and feature a first-order negative impact on medium-term growth.

Keywords: Uncertainty shocks, Reallocation, Growth

JEL Classification: E3; E6; G18