Financial Frictions and the Great Productivity Slowdown
IMF Working Papers, May 31, 2017
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- Financial Frictions and the Great Productivity Slowdown
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Bibliographic details
- Authors: Romain A Duval, Gee Hee Hong, Yannick Timmer
- Published: May 31, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484300701.001
Key findings
- The combination of pre-existing firm-level financial fragilities and tightening credit conditions made an important contribution to the post-2008 productivity slowdown in advanced economies.
- Specific empirical findings:
- Firms that entered the crisis with weaker balance sheets experienced decline in total factor productivity growth relative to their less vulnerable counterparts after the crisis.
- The decline in productivity growth was larger for firms located in countries where credit conditions tightened more.
- Financially fragile firms cut back on intangible capital investment compared to more resilient firms, providing a plausible channel through which financial frictions undermined productivity.
- All effects are described as highly persistent and quantitatively large—possibly accounting on average for about a third of the post-crisis slowdown in within-firm total factor productivity growth.
Data and empirical approach
- Uses a rich cross-country, firm-level data set.
- Exploits quasi-experimental variation in firm-level exposure to the 2008 global financial crisis to identify effects of financial frictions on productivity.
Mechanisms documented
- Balance sheet vulnerability at firm level (pre-crisis) amplified the hit to total factor productivity growth after the crisis.
- Tightening credit conditions at the country level interacted with firm-level vulnerability to produce larger declines in productivity.
- Reduction in intangible capital investment by financially fragile firms is identified as a plausible transmission channel linking financial frictions to lower productivity growth.
Quantitative magnitudes and persistence
- Effects are characterized as:
- Highly persistent over time.
- Quantitatively large in magnitude.
- Possibly accounting on average for about a third of the post-crisis slowdown in within-firm total factor productivity growth.
Robustness and alternative explanations
- The results are not driven by:
- More vulnerable firms being less productive before the crisis.
- More vulnerable firms having experienced slower productivity growth before the crisis.
- Differences between vulnerable and less vulnerable firms along other observed dimensions.
IMF Working Paper "Financial Frictions and the Great Productivity Slowdown" by Romain A Duval, Gee Hee Hong, and Yannick Timmer (May 31, 2017).
Content in this bundle
- Financial Frictions and the Great Productivity Slowdown, WP/17/129, May 2017