Publication Title

Macroeconomic Dynamics

Document Type

Article

Department or Program

Economics

Publication Date

7-1-2019

Keywords

Credit Constraints, Endogenous Growth, Financial Markets, Heterogeneous Agents

Abstract

We add households with heterogeneous discount factors and constrained credit to a research and development (R&D)-based endogenous growth model. Borrowers' access to credit has profound implications for growth. The direction and magnitude of this effect depend on preferences over labor supply. If labor supply is highly elastic and households do not smooth their labor supply between labor that produces output and R&D, annual growth decreases from 11.6% to approximately zero as the debt-to-capital ratio rises from 0 to 1.38. If households instead have a strong preference for smoothing their labor supply, then growth increases from 2.91% to 3.83% as the debt-to-capital ratio rises from 0 to 1.55. In both cases, less elastic labor supply weakens these effects. The results are similar if existing ideas do not affect the creation of new ideas. Now, when households do not smooth their labor supply, less debt results in faster growth, and productivity and output converge to much higher values.

Copyright Note

This is the author's version of the work. This publication appears in Bates College's institutional repository by permission of the copyright owner for personal use, not for redistribution.

Required Publisher's Statement

This article has been published in a revised form in Macroeconomic Dynamics https://doi.org/10.1017/S1365100517000608. This version is free to view and download for private research and study only. Not for re-distribution or re-use. © copyright holder.

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