Investment in Productivity and the Long-Run Effect of Financial Crisis on Output
52 Pages Posted: 26 Jan 2017
Date Written: December 14, 2016
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: Suggested Citation