Financial Shocks and TFP L4318Growth

IMF Working Papers, January 1, 2010

Source details

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, the authors show that increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth.
The decline in productivity growth accounts for a large fraction of the negative impact of funding costs on output.

Sample: 31 U.S. and Canadian industries.
Period: between 1991 and 2007.
Main empirical result: increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth.
Robustness checks reported:
- Results are not sensitive to controlling for industry size (ruling out increasing returns to scale as an explanation).
- Calculations account for changes in factor utilization (ruling out factor hoarding as an explanation).

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.

Subject: Bond yields, Capital productivity, Corporate bonds, Financial institutions, Production, Productivity, Total factor productivity
Keywords: Bond yields, Business cycles, Capital productivity, Corporate bonds, cost of capital, cost of funds, dividend yield, expected return, external finance, financial shocks, industry TFP, market portfolio, model relating TFP, production function, Productivity, relating TFP, returns to scale, sectoral TFP, total factor productivity, total factor productivity growth, WP