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

52 Pages Posted: 26 Jan 2017  

Maarten de Ridder

University of Cambridge - Faculty of Economics

Date Written: December 14, 2016

Abstract

This paper analyzes the channels through which financial crises exert long-term negative effects on output. Recent models suggest 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 519 U.S. corporations responsible for 54% of industrial research and development. Exploiting quasi-experimental variation in firm-level exposure to the 2008-9 financial crisis, I show that tight credit reduced investments in productivity-enhancement, and has significantly slowed down output growth between 2010 and 2015. A partial-equilibrium aggregation exercise suggests output would be 12% higher today if productivity-enhancing investments had grown at pre-crisis rates.

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 (December 14, 2016). CESifo Working Paper Series No. 6243. Available at SSRN: https://ssrn.com/abstract=2906232

Maarten Ridder (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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