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Economic Fluctuations, Productivity Growth and Stabilization Policies: A Keynesian Growth Perspective

Project description

Novel Keynesian growth model for studying business cycles and growth

In macroeconomic literature, the study of business cycles is separated from the analysis of long-run productivity growth. However, interactions between economic fluctuations, productivity growth and stabilisation policies are present in the policy debate. The EU-funded KEYNESGROWTH project aims to develop a Keynesian growth framework to study business cycles and growth in a unified theory. It will create a novel Keynesian growth model to study the impact of monetary and fiscal policy on productivity growth. It will explain why the inception of the euro led to a sharp increase in capital flows across its member countries and stagnant productivity growth in countries receiving capital inflows. It will furthermore test the hypothesis that productivity growth responds to business cycle fluctuations and to monetary and fiscal policy interventions.

Objective

The macroeconomic literature has traditionally separated the study of business cycles from the analysis of long-run productivity growth. Yet, the interactions between economic fluctuations, productivity growth and stabilization policies are well present in the policy debate, especially since the start of the Great Recession. In this proposal, I will develop a Keynesian growth framework to study business cycles and growth in a unified theory. The framework combines the Keynesian insight that fluctuations might be driven by changes in aggregate demand, with the notion, developed by the endogenous growth literature, that productivity growth is the result of firms’ investment in innovation.

In part I, I will develop a novel Keynesian growth model with heterogeneous firms, in the spirit of the state-of-the-art quantitative endogenous growth literature. I will use the framework to study the impact of monetary and fiscal policy on productivity growth; to understand the behavior of productivity during large recessions triggered by financial crises, such as the recent Great Recession; and to investigate the possibility that pessimistic expectations might give rise to periods of stagnation.

In part II, I will provide an open economy Keynesian growth model, able to capture the interactions between monetary policy, capital flows and productivity growth. I will use the framework to explain why the inception of the euro was associated with a sharp increase in capital flows across its member countries, and with stagnant productivity growth in countries recipients of capital inflows.

In part III, I will test the hypothesis, at the heart of the Keynesian growth framework, that productivity growth responds to business cycle fluctuations and to monetary and fiscal policy interventions. To this end, I will estimate the empirical response of productivity growth to policy and business cycle shocks, both in the United States and in a panel of advanced economies.

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Keywords

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Programme(s)

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Topic(s)

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Funding Scheme

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ERC-STG - Starting Grant

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Call for proposal

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(opens in new window) ERC-2019-STG

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Host institution

Centre de Recerca en Economia Internacional (CREI)
Net EU contribution

Net EU financial contribution. The sum of money that the participant receives, deducted by the EU contribution to its linked third party. It considers the distribution of the EU financial contribution between direct beneficiaries of the project and other types of participants, like third-party participants.

€ 537 000,00
Address
RAMON TRIAS FARGAS 25/27
08005 Barcelona
Spain

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Region
Este Cataluña Barcelona
Activity type
Research Organisations
Links
Total cost

The total costs incurred by this organisation to participate in the project, including direct and indirect costs. This amount is a subset of the overall project budget.

€ 537 000,00

Beneficiaries (1)

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