Endogenous growth, firm heterogeneity and the long-run impact of financial crises

Schmitz, Tom

How does firm heterogeneity affect the long-run consequences of financial crises? To answer this question, I introduce aggregate shocks and differences in the innovative potential of firms into a Schumpeterian endogenous growth model. Firm heterogeneity amplifies the effects of a financial crisis on aggregate innovation, because small firms are both relatively more innovative than large firms and hit harder by the crisis. A calibration using manufacturing data from Spain shows that a representative-firm model which ignores these mechanisms underestimates the long-run output losses due to the 2008-2013 crisis by around 40%.