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Financial shocks to banks, R&D investment, and recessions

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  • Ohdoi, Ryoji

Abstract

In some classes of macroeconomic models with financial frictions, an adverse financial shock successfully explains a decrease in real activity but simultaneously induces a stock price boom. The latter theoretical result is not consistent with data from actual financial crises. This study aims to provide a theoretical explanation for both prolonged recessions and stock price declines. I develop a simple macroeconomic model featuring a banking sector, financial frictions, and R&D-based endogenous growth. Both the analytical and numerical investigations show that endogenous R&D investment and a shock hindering banks’ financial intermediary function can be key to generating both a prolonged recession and a drop in firms’ stock prices.

Suggested Citation

  • Ohdoi, Ryoji, 2024. "Financial shocks to banks, R&D investment, and recessions," Macroeconomic Dynamics, Cambridge University Press, vol. 28(5), pages 999-1022, July.
    • Handle: RePEc:cup:macdyn:v:28:y:2024:i:5:p:999-1022_1
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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