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RESEARCH PAPER
Long Shadows of Financial Shocks: An Endogenous Growth Perspective
 
 
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1
University of Warsaw, Poland
2
European Central Bank, Germany
CORRESPONDING AUTHOR
Marcin Bielecki   

University of Warsaw, Poland
Submission date: 2022-05-22
Acceptance date: 2022-07-01
Publication date: 2022-09-30
 
GNPJE 2022;311(3):1–23
 
KEYWORDS
JEL CLASSIFICATION CODES
ABSTRACT
The Great Recession has resulted in a seemingly permanent level shift in many macroeconomic variables. This paper presents a microfounded general equilibrium model featuring frictional labour markets and financial frictions that is able to replicate the business cycle features of establishment dynamics and generate the procyclicality of R&D expenditures. This makes it possible to demonstrate the channels through which productivity and financial shocks influence the aggregate endogenous growth rate of the economy, creating level shifts in its balanced growth path. The results indicate that financial shocks are an important driver of aggregate fluctuations and their influence is especially pronounced for establishment entry. Since the growth rate of the economy can in principle be affected by policy measures, the macroeconomic and welfare effects of applying several subsidy schemes are examined. Subsidising R&D expenditures and lowering barriers to entry were found to be welfare improving, in line with endogenous growth literature. At odds with this literature, static subsidies to incumbents’ operating costs were also found to be welfare improving, a result that only emerges under the stochastic setting.
 
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