Credit Constraints, Cyclical Fiscal Policy and Industry Growth

79 Pages Posted: 26 Aug 2009

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

David Hémous

University of Zürich

Enisse Kharroubi

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2009

Abstract

This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long-term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing firms' market size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long-term projects, and the more so in sectors that rely more on external financing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical fiscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external finance or lower asset tangibility.

Keywords: counter-cyclicality, financial dependence, fiscal policy, growth

JEL Classification: E32, E62

Suggested Citation

Aghion, Philippe and Hemous, David and Kharroubi, Enisse, Credit Constraints, Cyclical Fiscal Policy and Industry Growth (July 2009). CEPR Discussion Paper No. DP7359. Available at SSRN: https://ssrn.com/abstract=1461988

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Hemous

University of Zürich ( email )

Zürich
Switzerland

Enisse Kharroubi

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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