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Faculty of Economics

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De Ridder, M.

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

CWPE1659

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 Codes: E32 E44 O30 O47

Author links: Maarten De Ridder  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1659.pdf

Open Access Link: https://doi.org/10.17863/CAM.21791