Uncertainty-Induced Reallocations, Innovation, and Growth
73 Pages Posted: 18 Nov 2016 Last revised: 24 Feb 2021
Date Written: December 4, 2016
Focusing on both micro and aggregate U.S. data, we document the existence of a significant link between aggregate uncertainty, capital markets valuations and reallocation of resources away from risky R&D-intensive capital. This link is important because a decrease in the aggregate share of R&D-oriented investments forecasts lower medium-term growth. We study a two-sector model in which one sector features relatively risky R&D-intensive capital essential to sustain growth, whereas the other sector features safer capital that is not innovation-intensive. Our model accounts for our novel empirical evidence obtained from both capital markets and aggregate data. We identify an important role for uncertainty shocks as they feature a first-order negative impact on medium-term growth and welfare.
Keywords: Uncertainty shocks, Reallocation, Growth
JEL Classification: E3; E6; G18
Suggested Citation: Suggested Citation