Volatility and Growth

by Philippe Aghion, Abhijit V. Banerjee

It has long been recognized that productivity growth and the business cycle are closely interrelated. Yet, until recently, the two phenomena have been investigated separately in the economics literature. This book provides the first consistent attempt to analyze the effects of macroeconomic volatility on productivity growth, and also the reverse causality from growth to business cycles. The authors show that by looking at the economy through the lens of private entrepreneurs, who invest under credit constraints, one can go some way towards explaining persistent macroeconomic volatility and the effects of volatility on growth. Beginning with an analysis of the effects of volatility on growth, the authors argue that the lower the level of financial development in a country the more detrimental the effect of volatility on growth. This prediction is confirmed by cross-country panel regressions. The data also suggests that a fixed exchange rate regime or more countercyclical budgetary
policies are growth-enhancing in countries with a lower level of financial development. The former reduce aggregate volatility whereas the latter reduce the negative effects of volatility on long-term productivity-enhancing investment by firms. The book concludes with an investigation into how the interplay between credit constraints and pecuniary externalities is sufficient to generate persistent business cycles and to explain the occurrence of currency crises.

Genres: Economics

160 pages, Hardcover

First published January 1, 2005

About the author

He is Robert C. Waggoner Professor of Economics at Harvard University, Professor of Economics at London School of Economics, and an invited professor at the Paris School of Economics, having previously been Professor at University College London, an Official Fellow at Nuffield College, Oxford, and an Assistant Professor at Massachusetts Institute of Technology (MIT).

Reviews

[Richard Marney · Rating 5 out of 5]

The central takeaway of this enormously insightful book (encompassing previous lectures of the authors) is that shocks to the borrowing capacity of firms have spillovers to the rest of the economy, whether positive of negative, via their effects on the borrowing, investment, employment, production, etc. channel. The authors identify the so-called third generation or self-fulfilling currency crisis as a compelling (“extreme”) example of this phenomenon as agents with FX-debt anticipate an episode of currency depreciation. This development will increase the cost of capital, squeeze free cash flow, and lead to lower investment levels, with the expected negative knock-on effects to the broader economy. The book builds up to this point through a series of models incorporating credit constraints and taking into consideration differing levels of financial development, and ends with a discussion of policy implications.

[Diego · Rating 4 out of 5]

Volatility and Growth es un muy buen trabajo donde se construye un modelo monetario un tanto alternativo para analizar las fuentes e impacto de la volatilidad en la estabilidad económica en corto plazo y el crecimiento en el largo plazo.

El análisis se centra en el estudio de crisis generadas por volatilidad y en que casos estas no ocurren, particularmente dándolo un rol principal al sector financiero como fuente de financiamiento y a los emprendedores y firmas que acuden a el por créditos para inversión.

Por último hace una buena contribución al estudio de las crisis de tipo de cambio con su aproximación en una tercera generación que se centra en la deuda de las firmas en moneda extranjera como disparador de crisis en economías con niveles medios y bajos de desarrollo financiero.

En la situación actual de la economía mundial, es una lectura valiosa que puede resultar útil para entender algunos aspectos y componentes de la crisis actual.