Aghion, PhilippeAngeletos, George-MariosBanerjee, AbhijitManova, Kalina2014-07-112010Aghion, Philippe, George-Marios Angeletos, Abhijit Banerjee, and Kalina Manova. 2010. “Volatility and Growth: Credit Constraints and the Composition of Investment.” Journal of Monetary Economics 57 (3) (April): 246–265.0304-3932http://nrs.harvard.edu/urn-3:HUL.InstRepos:12490636This paper examines how uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth. We develop a model where firms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity growth. Because it takes longer to complete, long-term investment has a relatively less cyclical return; but it also has a higher liquidity risk. The first effect ensures that the share of long-term investment to total investment is countercyclical when financial markets are perfect; the second implies that this share may turn procyclical when firms face tight credit constraints. The contribution of the paper is thus to identify a novel propagation mechanism: through its effect on the cyclical composition of investment, tighter credit can lead to both higher volatility and lower mean growth. Evidence from a panel of countries provides support for the model’s key predictions.en-USGrowthvolatilitycredit constraintsbusiness cyclesamplificationproductivityJournal Article2014-07-1110.1016/j.jmoneco.2010.02.005