Financial Shocks to Banks, R&D Investment, and Recessions

Ohdoi, Ryoji (2020): Financial Shocks to Banks, R&D Investment, and Recessions.

Abstract

In some classes of macroeconomic models with financial frictions, an adverse financial shock successfully explains a drop in GDP, but simultaneously induces a stock price boom. The latter theoretical result is not consistent with data from actual financial crises. This study develops a simple macroeconomic model featuring a banking sector, financial frictions, and R&D-led endogenous growth to examine the impacts of an adverse financial shock to banks on firms' R&D investments and equity prices. Both the analytical and numerical investigations show that a shock that hinders the banks' financial intermediary function can be a key to generating both a prolonged recession and a drop in the firms' equity prices.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks; Endogenous growth; Financial frictions; Financial shocks; Quality-ladder growth model
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G0 - General > G01 - Financial Crises; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

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