CAPITAL-LABOR COMPLEMENTARITIES IN R&D PRODUCTION AND THE LINGERING EFFECTS OF ECONOMIC SLOWDOWNS

In an attempt to advance our understanding of the potential long-run benefits of macroeconomic stabilization policies, the paper studies the long-term effects of economic slowdowns. We construct a discrete-time endogenous growth model, in which a recession, defined as a reduction in resource utilization for a limited number of periods, may have long-lasting detrimental effects on the growth path of the economy. We study the long-term consequences of recessions of various durations and intensities by comparing an economy that grows at steady state rates to one that experiences a recession. The long-run effects of a recession are estimated as the discounted present value of the output differences of the two economies. Our results show that even mild recessions, such as those observed in the last 50 years in the U.S., can have long-lasting adverse level effects on output. A typical recession that causes a 1% reduction in GDP for one year, after which the economy returns to its steady-state 3% growth rate, may result in output losses whose present value is equivalent to 6.5% of the pre-recession output.