Private-Sector Financial Liabilities in Advanced Economies: Is More Better?

IMF Working Papers, May 1, 2007

Source details

Canonical URL: Private-Sector Financial Liabilities in Advanced Economies: Is More Better?

Advanced economies have experienced diverse developments in accumulation of financial liabilities by their household and corporate sectors since around 1995.
Cross-country–industry evidence indicates that:
- The type of the financial system and the degree of labor market flexibility matter for the economic impact of expanded borrowings.
- In countries with a more arm's length–based financial system and less rigid labor market, faster creation of corporate liabilities in recent years appears to have:
- Spurred growth of industries more reliant on external finance.
- Strengthened the development of growing industries.
The findings suggest an association of recent increases in corporate borrowings with:
- A reduction in costs of external finance.
- An improvement in resource allocation — two supposed channels through which finance facilitates growth.

Financial system structure matters: arm's length–based systems appear to amplify the positive growth effects of corporate borrowing in certain contexts.
Labor market flexibility interacts with financial deepening: less rigid labor markets are associated with stronger positive outcomes from expanded corporate liabilities.
Mechanisms highlighted:
- Cost of external finance: increases in corporate borrowings associated with reduction in costs.
- Resource allocation: increased corporate borrowings associated with improvements in resource allocation across industries.

Subject: Financial sector development, Labor market flexibility, Labor markets, Productivity, Real interest rates
Keywords: external finance, financial system, GDP, labor market, WP

Source: Man-Keung Tang, "Private-Sector Financial Liabilities in Advanced Economies: Is More Better?", IMF Working Papers 2007, 118 (May 1, 2007).