Transcript On the Link Between Cycles and Growth

On the Link Between
Cycles and Growth
Min Ouyang
Macro-economic Research
• Macro only: the balance of macro
variables at the aggregate level only.
– GDP, Aggregate Investment, Aggregate
Consumption; Interest Rate…
• Macro with a micro foundation:
– Aggregate
– Industry
– Individual, firms
An Example: Unemployment
• Macro-only macro:
– interest rate and unemployment?
• Macro with a micro foundation:
– Job search;
– Contracting theory;
– Innovation and industry structural change;
– Labor-market institutions: minimum-wage law;
unemployment insurance; health insurance.
Macro is Everything!
• Anything interesting is related to
macroeconomic thinking and contributes
to macroeconomic outcome.
• Macro outcome is the aggregation of
individual and firm behaviors.
Current Recession
• Cannot be explained by macro-only
macro-economic thinking.
• The collapse of the financial market:
– Asymmetric information between lenders and
borrowers;
– Re-sale of “lemon” investment packages.
I am…
• A micro-foundation Macroeconomist.
– Labor economics;
– Industry organization.
My Current Research
• The link between long-run growth and short-run
cycles.
– Growth economists investigate long-run growth rates
and innovation. They ignore short-run cycles.
– Business-cycle economists take long-run growth as
given and examine short-run fluctuations around the
growth trend.
– However, the two can be an unified phenomenon.
And the causality can go both ways.
Cycles and Growth
From Cycles to Growth
• Growth is driven by activities such as:
– Innovation: new technology; new products;
– Re-organization;
– Reallocation.
• Cycles impact growth through their
influence on growth activities:
– The cyclicality of innovation;
– And the growth consequence of such
cyclicality.
The Cyclicality of R&D
• R&D expenditure provides a measure for
innovation input.
• The cyclicality of R&D reflects how shortrun cycles influence innovation inputs.
The opportunity-cost View
• Schumpeter (1939)
– Firms produce and innovate:
– Resource is limited:
– When you innovate more, you’ve got to
produce less.
– Thus, firms innovate more during recessions
when the return to production is low.
• Reallocation is indeed counter-cyclical.
School enrollment is also counter-cyclical.
Aggregate R&D is Pro-cyclical
?
• Does aggregate data really reflect the
timing of R&D at the firm level?
• We need micro data, ideally, firm-level
data;
• I take a compromise, looking at industrylevel data.
An Industry Panel of
R&D and Output
• Output by industry: the NBER
Manufacturing Productivity Database
(1958-2002); output is measured as real
value added.
• R&D by industry from the NSF (19581998); R&D is deflated by GDP deflator.
Decomposition
N industries, indexed by i
Decomposition of Variances and
Co-variance
Pro-cyclical Aggregate R&D
• Dominated by co-movement of R&D and
output across different industries.
• The co-movement between R&D and
output within industry differs significantly
by industry.
• The OC theory should be examined at the
micro-level.
The Cyclicality of Industry R&D
Two elements:
1. Financial-Market Frictions/Liquidity
constraints;
2. Cyclical Persistence.
Financial-Market Frictions
• Basic Story:
– Firms’ ability to finance R&D weakens during
recessions, so that their R&D lowers even if
firms desire to raise R&D.
• Data:
– Combining my R&D panel with data on
financial indicators from the Quarterly
Financial Reports by the Census of Bureau.
– 16-industry panel: R&D, output, and Finance.
Financial-Market Frictions
• Contributes to the cross-industry
differences in R&D’s Cyclicality.
• Provides an explanation for Petroleum
Refining R&D’s being counter-cyclical.
• But cannot explain all.