Growth, Slowdowns, and Recoveries

Francesco Bianchi, Howard Kung, Gonzalo Morales

NBER Working Paper No. 20725
Issued in December 2014, Revised in January 2017
NBER Program(s):   EFG   ME

We construct and estimate a model that features endogenous growth and technology adoption to study the link between business cycle fluctuations and long-term growth since WWII. The presence of spillover effects from research and development (R&D) imply an endogenous relation between productivity growth and the state of the economy. During the Great Recession, the endogenous component of TFP dropped precipitously, while R&D and long-term growth were not equally affected. The opposite occurred during the 2001 recession, which corresponded to a large decline in R&D. We interpret these results in light of the different forms of financing for investment in physical capital versus R&D. Monetary and fiscal interventions mitigated the drop in real activity and adoption of existing technologies. During the Great Inflation, transitory inflationary shocks led to a persistent productivity slowdown. The growth mechanism induces positive comovement between consumption and investment. Shocks to the marginal efficiency of investment explain the bulk of the low-frequency variation in growth rates.

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Document Object Identifier (DOI): 10.3386/w20725

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