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Financial Shocks and TFP Growth

Author/Editor: Severo, Tiago | Estevão, Marcello
Authorized for Distribution: January 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,075KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: The paper investigates how changes in industries' funding costs affect total factor productivity (TFP) growth. Based on panel regressions using 31 U.S. and Canadian industries between 1991 and 2007, and using industries' dependence on external funding as an identification mechanism, we show that increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth. This finding cannot be explained by either increasing returns to scale or factor hoarding, as results are not sensitive to controlling for industry size and our calculations account for changes in factor utilization. Based on a stylized theoretical model, the estimates suggest that financial shocks distort the allocation of factors across firms even within an industry, reducing its TFP. The decline in productivity growth accounts for a large fraction of the negative impact of funding costs on output.
 
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Series: Working Paper No. 10/23
Subject(s): Bonds | Corporate sector | External financing | External shocks | Industrial sector | Production growth
Author's keyword(s): Business cycles | total factor productivity | financial shocks
 
English  
    Published:   January 1, 2010        
    ISBN/ISSN:   9781451962376   Format:   Paper
    Stock No:   WPIEA2010023   Pages:   26
    Price:   US$18.00
       
     
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