Virtue of Bad Times and Financial Market Frictions
نویسنده
چکیده
Schumpeter (1939) proposes that recessions have virtue in promoting growth-enhancing activities. However, this view is often at odds with data, as many innovative activities appear pro-cyclical. We revisit the virtue of bad timestheoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovations marginal opportunity cost dominates that of its marginal expected return; but binding nancial constraints can hinder such virtue, preventing innovation from rising during recessions. Our theory is carried to an industry panel of production and innovation. Our evidence suggests that recessions indeed have potential virtue, but such virtue is hindered by nancial-market frictions. JEL codes: E32, E44, O30. Key words: recessions, growth, R&D, nancial-market frictions. Department of Economics, University of California, Irvine, CA, 92697. Email: [email protected]. Tele: 9498249698. Fax: 9498242182. The author thanks Wayne Gray and Randy Becker for their kindly providing the extended NBER manufacturing productivity databases, and Stephanie Yang for research assistance. John Leahy, Linda Cohen, Dan Bogart, Guillaume Rocheteau, Peter Rupert, Randy Wright, Borogan Aruoba, and seminar participants at the Atlanta Fed, USC, the Brookings Institutions, and the 2010 Midwest Macro Meeting provided helpful discussions. All errors are mine.
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