Financial Shocks and TFP Growth

36 Pages Posted: 15 Feb 2010

See all articles by Marcello M. Estevão

Marcello M. Estevão

International Monetary Fund (IMF) - Western Hemisphere Department

Tiago Severo

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: Janurary 2010

Abstract

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, we show that increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth. This finding cannot be explained by either increasing returns to scale or factor hoarding, as results are not sensitive to controlling for industry size and our calculations account for changes in factor utilization. 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. The decline in productivity growth accounts for a large fraction of the negative impact of funding costs on output.

Keywords: Bonds, Business cycles, Canada, Corporate sector, External financing, External shocks, Financial crisis, Industrial sector, Production growth, Productivity, United States

Suggested Citation

Estevao, Marcello M. and Severo, Tiago, Financial Shocks and TFP Growth (Janurary 2010). IMF Working Paper No. 10/23, Available at SSRN: https://ssrn.com/abstract=1552290

Marcello M. Estevao (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

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Tiago Severo

affiliation not provided to SSRN

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