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ENDOGENOUS GROWTH AND HOUSEHOLD LEVERAGE

Published online by Cambridge University Press:  25 September 2017

Emily C. Marshall ,
Hoang Nguyen  and
Paul Shea
Emily C. Marshall
Affiliation:
Dickinson College
Hoang Nguyen
Affiliation:
Bates College
Paul Shea*
Affiliation:
Bates College
*
Address correspondence to: Paul Shea, Bates College, 270 Pettengill Hall, Lewiston, ME 04210USA; e-mail: pshea@bates.edu.
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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.

Keywords

Credit ConstraintsHeterogeneous AgentsFinancial MarketsEndogenous Growth
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 5 , July 2019 , pp. 2089 - 2113
Copyright
Copyright © Cambridge University Press 2017 

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