Investment in Productivity and the Long-Run Effect of Financial Crises on Output
Centre for Macroeconomics and Cambridge INET working paper, September 2016 - Updated October 2017
Abstract: This paper identifies the mechanism through which financial crises exert long-term negative effects on output. Theory suggests 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 522 U.S. corporations responsible for 58% of industrial research and development. Exploiting exogenous variation in firm-level exposure to the Global Financial Crisis, I show that tight credit reduced investments in productivity-enhancement, and significantly slowed down output growth between 2010 and 2015. A partial-equilibrium aggregation exercise suggests GDP would be at least 3.2% higher today if productivity-enhancing investments had grown at pre-crisis rates.
- Media Coverage: Mejudice, The Guardian, VoxEU, Wall Street Journal
- Presentations: U. of Cambridge; CPB Netherlands; Tilburg U.; De Nederlandsche Bank; U. of Oxford; 7th CESIfo Conference on Survey Data and Macroeconomics; Joint CEPR, Bank of England, CFM, BHC Workshop on Finance, Investment and Productivity; Royal Economy Society 2017; BGSE Summer Forum: Firms in the Global Economy; ECB Forum on Central Banking (poster); 5th ECB/CBRT Joint Conference
Policy Shocks and Wage Rigidities: Empirical Evidence from the Regional Effect of National Shocks
Cambridge INET working paper, April 2017 (with Damjan Pfajfar, Federal Reserve Board). Submitted.
Abstract: This paper studies the effect of wage rigidities on the transmission of fiscal and monetary policy shocks. We calculate downward wage rigidities across U.S. states using the Current Population Survey. These estimates are used to explain differences in the state-level economic effects of identical national shocks in interest rates and taxes. In line with the role of sticky wages in New Keynesian models, we find that contractionary monetary policy and tax shocks increase unemployment and decrease economic activity in rigid states considerably more than in flexible states. We also find larger and more persistent effects of monetary and tax policy shocks for states where the ratio between minimum and median wage is higher and for states that do not have right-to-work legislation.