No. 909: Uncertainty, Intangible Capital, and Productivity Dynamics
Edoardo Palombo ,
Queen Mary University of London
June 25, 2020
Following an unparalleled rise in uncertainty over the Great Recession, the US economy has been experiencing anaemic productivity growth. This paper offers a quantitative study on the link between uncertainty and low productivity growth. Firstly, using micro level data I show that uncertainty accounts for half of the drop in intangible capital stock during the Great Recession. Secondly, to investigate the effect of uncertainty on productivity growth dynamics, I present a novel general equilibrium endogenous growth model with heterogeneous firms that undertake intangible capital investment subject to non-convex costs and time-varying uncertainty. I show that uncertainty can generate slow recoveries and a persistent slowdown in productivity growth when accounting for the empirical discrepancy between the realised and expected changes to the second-moment of fundamentals.
J.E.L classification codes: O40, O41, O51
Keywords:Uncertainty, R&D, Innovation, Productivity, Great Recession, Intangible Capital, Slow Recoveries