Volatility and growth: credit constraints and productivity-enhancing investment

We examine how credit constraints affect the cyclical behavior of productivity-enhancing investment and thereby volatility and growth. We first develop a simple growth model where firms engage in two types of investment: a short-term one and a long-term productivity-enhancing one. Because it takes longer to complete, long-term investment has a relatively less procyclical return but also a higher liquidity risk. Under complete financial markets, long-term investment is countercyclical, thus mitigating volatility. But when firms face tight credit constraints, long-term investment turns procyclical, thus amplifying volatility. Tighter credit therefore leads to both higher aggregate volatility and lower mean growth for a given total investment rate. We next confront the model with a panel of countries over the period 1960-2000 and find that a lower degree of financial development predicts a higher sensitivity of both the composition of investment and mean growth to exogenous shocks, as well as a stronger negative effect of volatility on growth

Information Revolutions and the Overthrow of Autocratic Regimes

This paper presents a model of information quality and political regime change. If enough citizens act against a regime, it is overthrown. Citizens are imperfectly informed about how hard this will be and the regime can, at a cost, engage in propaganda so that at face-value it seems hard. The citizens are rational and evaluate their information knowing the regime's incentives. The model makes three predictions. First, even rational citizens may not correctly infer the amount of manipulation. Second, as the intrinsic quality of information available becomes sufficiently high, the regime is more likely to survive. Third, the regime benefits from ambiguity about the amount of manipulation, and consequently, as it becomes cheaper to manipulate, the regime is also more likely to survive. Key results of the benchmark static model extend to a simple dynamic setting where there are waves of unrest