IDEAS home Printed from https://ideas.repec.org/p/irv/wpaper/101103.html
   My bibliography  Save this paper

Virtue of Bad Times and Financial Market Frictions

Author

Listed:
  • Min Ouyang

    (Department of Economics, University of California-Irvine)

Abstract

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 times" theoretically and empirically. Our theory suggests that recessions have such virtue only when the cyclicality of innovation's marginal opportunity cost dominates that of its marginal expected return; but binding financial 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 financial-market frictions.

Suggested Citation

  • Min Ouyang, 2010. "Virtue of Bad Times and Financial Market Frictions," Working Papers 101103, University of California-Irvine, Department of Economics.
    • Handle: RePEc:irv:wpaper:101103
    as

    Download full text from publisher

    File URL: https://www.economics.uci.edu/files/docs/workingpapers/2010-11/ouyang-3.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Philippe Aghion & Philippe Askenazy & Nicolas Berman & Gilbert Cette & Laurent Eymard, 2012. "Credit Constraints And The Cyclicality Of R&D Investment: Evidence From France," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1001-1024, October.
    2. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 717-737.
    3. Fatas, Antonio, 2000. "Do Business Cycles Cast Long Shadows? Short-Run Persistence and Economic Growth," Journal of Economic Growth, Springer, vol. 5(2), pages 147-162, June.
    4. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    5. Saint-Paul, Gilles, 1993. "Productivity growth and the structure of the business cycle," European Economic Review, Elsevier, vol. 37(4), pages 861-883, May.
    6. Shea, John S, 2002. "Complementarities and Comovements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 412-433, May.
    7. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
    8. Gadi Barlevy, 2007. "On the Cyclicality of Research and Development," American Economic Review, American Economic Association, vol. 97(4), pages 1131-1164, September.
    9. Aghion, Philippe & Banerjee, Abhijit, 2005. "Volatility and Growth," OUP Catalogue, Oxford University Press, number 9780199248612.
    10. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    11. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
    12. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
    13. Aghion, Philippe & Saint-Paul, Gilles, 1998. "VIRTUES OF BAD TIMES Interaction Between Productivity Growth and Economic Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(3), pages 322-344, September.
    14. Aghion, P. & Askenazy, P. & Berman, N. & Cette, G. & Eymard, L., 2008. "Credit Constraints and the Cyclicality of R&D Investment: Evidence from France," Working papers 198, Banque de France.
    15. Philippe Aghion & George-Marios Angeletos & Abhijit Banerjee & Kalina Manova, 2005. "Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment," NBER Working Papers 11349, National Bureau of Economic Research, Inc.
    16. Min Ouyang, 2011. "On the Cyclicality of R&D," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 542-553, May.
    17. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Min Ouyang, 2010. "Cyclical Persistence and the Cyclicality of R&D," Working Papers 101104, University of California-Irvine, Department of Economics, revised Mar 2011.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Min Ouyang, 2010. "Cyclical Persistence and the Cyclicality of R&D," Working Papers 101104, University of California-Irvine, Department of Economics, revised Mar 2011.
    2. Aysun, Uluc, 2020. "Volatility costs of R&D," European Economic Review, Elsevier, vol. 122(C).
    3. Uluc Aysun & Zeynep Yom, 2019. "R&D, innovation spillover and business cycles," Villanova School of Business Department of Economics and Statistics Working Paper Series 43, Villanova School of Business Department of Economics and Statistics.
    4. Ramirez-Rondán Nelson, 2007. "Nonlinear Volatility Effects on Growth in Developing Economies," Working Papers 2007-016, Banco Central de Reserva del Perú.
    5. Ahmad, Manzoor, 2021. "Non-linear dynamics of innovation activities over the business cycles: Empirical evidence from OECD economies," Technology in Society, Elsevier, vol. 67(C).
    6. Pellens, Maikel & Peters, Bettina & Hud, Martin & Rammer, Christian & Licht, Georg, 2018. "Public investment in R&D in reaction to economic crises: A longitudinal study for OECD countries," ZEW Discussion Papers 18-005, ZEW - Leibniz Centre for European Economic Research.
    7. Pilar Beneito & María E. Rochina-Barrachina & Amparo Sanchis, 2013. "Ownership and cyclicality of firms’ R&D investment," Working Papers 1306, Department of Applied Economics II, Universidad de Valencia.
    8. Barbara Annicchiarico & Alessandra Pelloni, 2014. "Productivity growth and volatility: how important are wage and price rigidities?," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 306-324, January.
    9. Makridis, Christos A. & McGuire, Erin, 2023. "The quality of innovation “Booms” during “Busts”," Research Policy, Elsevier, vol. 52(1).
    10. Silvestri, Daniela & Riccaboni, Massimo & Della Malva, Antonio, 2018. "Sailing in all winds: Technological search over the business cycle," Research Policy, Elsevier, vol. 47(10), pages 1933-1944.
    11. Grimm, Niklas & Laeven, Luc & Popov, Alexander, 2021. "Quantitative easing and corporate innovation," Working Paper Series 2615, European Central Bank.
    12. García-Vega, María & Gupta, Apoorva & Kneller, Richard, 2023. "Is acquisition-FDI during an economic crisis detrimental for domestic innovation?," DICE Discussion Papers 403, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    13. Hud, Martin & Hussinger, Katrin, 2015. "The impact of R&D subsidies during the crisis," Research Policy, Elsevier, vol. 44(10), pages 1844-1855.
    14. Aysun, Uluc & Kabukcuoglu, Zeynep, 2019. "Interest rates, R&D investment and the distortionary effects of R&D incentives," European Economic Review, Elsevier, vol. 111(C), pages 191-210.
    15. Uluc Aysun & Melanie Guldi & Adam Honig & Zeynep Yom, 2020. "R&D, Market Power and the Cyclicality of Employment," Working Papers 2020-01, University of Central Florida, Department of Economics.
    16. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 246-265, April.
    17. Dolores Añón Higón & Miguel Manjón & Juan A. Máñez & Juan A. Sanchis-Llopis, 2014. "Does R&D Protect Smes From The Hardness Of The Cycle? Evidence From Spanish Smes (1990-2009)," Working Papers 1411, Department of Applied Economics II, Universidad de Valencia.
    18. Galo Nuño, 2011. "Optimal research and development and the cost of business cycles," Journal of Economic Growth, Springer, vol. 16(3), pages 257-283, September.
    19. Hans van Ophem & Noud van Giersbergen & Kees Jan van Garderen & Maurice Bun, 2019. "The cyclicality of R&D investment revisited," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(2), pages 315-324, March.
    20. Lee, Dongyeol, 2016. "Role of R&D in the productivity growth of Korean industries: Technology gap and business cycle," Journal of Asian Economics, Elsevier, vol. 45(C), pages 31-45.

    More about this item

    Keywords

    Recessions; Growth; Financial-market frictions;
    All these keywords.

    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
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:irv:wpaper:101103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Melissa Valdez (email available below). General contact details of provider: https://edirc.repec.org/data/deucius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.