Slowdown Risk: The Quest for Sustainable Growth.

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Swissotel Chicago, Zurich C
Hosted By: American Economic Association
  • Chair: Andrew Atkeson, University of California-Los Angeles

Growth, Slowdowns, and Recoveries

Francesco Bianchi
,
Cornell University
Howard Kung
,
London Business School

Abstract

We construct and estimate a model that features endogenous growth and technology diffusion.
The spillover effects from research and development provide a link between business cycle
fluctuations and long-term growth. Therefore, productivity growth is related to the state of the
economy. Shocks to the marginal efficiency of investment explain the bulk of the low-frequency
variation in growth rates. Transitory inflationary shocks lead to persistent declines in economic
growth. During the Great Recession, technology diffusion dropped sharply, while long-term
growth was not significantly affected. The opposite occurred during the 2001 recession. The
growth mechanism induces positive comovement between consumption and investment.

Endogenous Technology Adoption and R&D as Sources of Business Cycle Persistence

Diego Anzoategui
,
New York University
Diego Comin
,
Dartmouth College
Mark Gertler
,
New York University
Joseba Martinez
,
New York University

Abstract

We examine the hypothesis that the slowdown in productivity following the Great
Recession was in significant part an endogenous response to the contraction in demand
that induced the downturn. To do so we augment a workhorse New Keynesian DSGE
model with an endogenous TFP mechanism that allows for both costly development
and adoption of new technologies. We then estimate the model and use it to assess
the sources of the productivity slowdown. We find that the post-Great Recession fall
in productivity was a largely endogenous phenomenon. The endogenous productiivity
mechanism also helps account for the slowdown in productivity prior to the Great
Recession. Overall, the results are consistent with the view that demand factors have
played a role in the slowdown of capacity growth. More generally, they provide insight
into why recoveries from financial crises may be so slow.

The Aggregate Implications of Innovative Investment in the Garcia-Macia, Hsieh and Klenow Model

Andrew Atkeson
,
University of California-Los Angeles
Ariel Burstein
,
University of California-Los Angeles

Abstract

we extend the model firm dynamics of Garcia-Macia, Hsieh, and Klenow (2016) to include a description of the costs of innovative investments as in the model of Klette and Kortum (2004). In this model, aggregate productivity (TFP) grows as a result of innovative investment by incumbent and entering firms in improving continuing products and acquiring new products to the firm. This model serves as a useful benchmark because it nests both Quality-Ladders based Neo-Shumpeterian models and Expanding Varieties models commonly used in the literature and, at the same time, it provides a rich model of firm dynamics as described in GHK. We show how data on firm dynamics and firm value can be used to infer the elasticities of aggregate productivity growth with respect to changes in incumbent firms' investments in improving their incumbent products, incumbent firms' investments in acquiring products new to the firm, and entering firms' investments in acquiring new products. As discussed in Atkeson and Burstein (2015), these elasticities are a crucial input in evaluating the extent to which it is possible to alter the medium term growth path of the macroeconomy through policies aimed at stimulating innovative investments by firms. We use these methods to provide quantitative estimates of these elasticities of aggregate TFP growth with respect to changes in each of the three categories of innovative investment in the model as well as of the rate of social depreciation of innovation expenditures. We demonstrate that these quantitative implications of the model are highly sensitive to one's estimate of the baseline research intensity of the economy and to one's estimate of the baseline market value of intangible capital within firms.

A Tax Plan for Endogenous Innovation

Mariano Croce
,
University of North Carolina-Chapel Hill
Anastasios Karantounias
,
Federal Reserve Bank of Atlanta
Steve Raymond
,
University of North Carolina-Chapel Hill
Lukas Schmid
,
Duke University

Abstract

In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the positive spillovers of innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation.
Discussant(s)
Marco Del Negro
,
Federal Reserve Bank of New York
James M. Nason
,
North Carolina State University
Francisco Buera
,
Federal Reserve Bank of Chicago
Marco Bassetto
,
Federal Reserve Bank of Chicago
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • O3 - Innovation; Research and Development; Technological Change; Intellectual Property Rights