Volatility and GrowthIt has long been recognized that productivity growth and the business cycle are closely interrelated. Yet, until recently, the two phenomena have been investigated separately in the economics literature. This book provides the first consistent attempt to analyze the effects of macroeconomic volatility on productivity growth, and also the reverse causality from growth to business cycles. The authors show that by looking at the economy through the lens of private entrepreneurs, who invest under credit constraints, one can go some way towards explaining persistent macroeconomic volatility and the effects of volatility on growth. Beginning with an analysis of the effects of volatility on growth, the authors argue that the lower the level of financial development in a country the more detrimental the effect of volatility on growth. This prediction is confirmed by cross-country panel regressions. The data also suggests that a fixed exchange rate regime or more countercyclical budgetary policies are growth-enhancing in countries with a lower level of financial development. The former reduce aggregate volatility whereas the latter reduce the negative effects of volatility on long-term productivity-enhancing investment by firms. The book concludes with an investigation into how the interplay between credit constraints and pecuniary externalities is sufficient to generate persistent business cycles and to explain the occurrence of currency crises. |
Contents
Introduction | 1 |
0 Modeling Credit Markets | 5 |
AK versus Schumpeterian Approach | 10 |
2 Financial Development and the Effects of Volatility on Growth | 23 |
Pecuniary Externalities and the Credit Channel | 49 |
4 Endogenous Volatility in an Open Economy | 68 |
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Common terms and phrases
AABM activity aggregate Aghion amount analysis argued assume average banks becomes boom borrowing capacity capital changes chapter consider cost countercyclical countries country-specific credit constraints crisis currency crises curve cycle debt demand denote depreciation domestic dynamic economy effect endogenous entrepreneurs equal equation equilibrium example exchange rate expected fact factor Figure Finally financial development firms fixed flow fluctuations follows fully given growth rate higher implies increase initial innovation interaction interest interest rate IPLM leads lender lending less level of financial limit liquidity long-run long-term investment lower measure monetary policy needs negative nominal Note occur output particular period positive possibility predictions procyclical productivity productivity shock profits ratio reduce remains result savings sector shift shocks slump Source standard sufficiently supply term turn variables volatility wealth