Investment in Productivity and the Long-Run Effect of Financial Crisis on Output

56 Pages Posted: 26 Jan 2017  

Maarten de Ridder

University of Cambridge - Faculty of Economics

Date Written: October 2017

Abstract

This paper identifies the mechanism through which financial crises exert long-term negative effects on output. Theory suggests that a shortfall in productivity-enhancing investments temporarily slows technological progress, creating a gap between pre-crisis trend and actual GDP. This hypothesis is tested using a linked lender-borrower dataset on 522 U.S. corporations responsible for 58% of industrial research and development. Exploiting exogenous variation in firm-level exposure to the Global Financial Crisis, I show that tight credit reduced investments in productivity-enhancement, and significantly slowed down output growth between 2010 and 2015. A partial-equilibrium aggregation exercise suggests GDP would be at least 3.2% higher today if productivity-enhancing investment intensity had remained at its pre-crisis level.

Keywords: financial crises, endogenous growth, innovation, business cycles

JEL Classification: E320, E440, O300, O470

Suggested Citation

Ridder, Maarten de, Investment in Productivity and the Long-Run Effect of Financial Crisis on Output (October 2017). CESifo Working Paper Series No. 6243. Available at SSRN: https://ssrn.com/abstract=2906232

Maarten de Ridder (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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