Aggregate Uncertainty and Sectoral Productivity Growth : The Role of Credit Constraints

Author/Editor:

Sangyup Choi ; Davide Furceri ; Yi Huang ; Prakash Loungani

Publication Date:

August 16, 2016

Electronic Access:

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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:

We show that an increase in aggregate uncertainty—measured by stock market volatility—reduces productivity growth more in industries that depend heavily on external finance. This effect is larger during recessions, when financing constraints are more likely to be binding, than during expansions. Our statistical method—a difference-in-difference approach using productivity growth for 25 industries for 18 advanced economies over the period 1985-2010—mitigates concerns with omitted variable bias and reverse causality. The results are robust to the inclusion of other sources of interaction effects, such as financial development (Rajan and Zingales, 1998) and counter-cyclical fiscal policy (Aghion et al., 2014). The results also hold if economic policy uncertainty (Baker et al., 2015) is used instead of stock market volatility as the measure of aggregate uncertainty.

Series:

Working Paper No. 16/174

Subject:

English

Publication Date:

August 16, 2016

ISBN/ISSN:

9781475526370/1018-5941

Stock No:

WPIEA2016174

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

43

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