Liquidity and growth: the role of counter-cyclical interest rates

Philippe Aghion, Emmanuel Farhi and Enisse Kharroubi

No 489, BIS Working Papers from Bank for International Settlements

Abstract: In this paper, we use cross-industry, cross-country panel data to test whether industry growth is positively affected by the interaction between the reaction of real short-term interest rates to the business cycle and industry-level measures of financial constraints. Financial constraints are measured, either by the extent to which an industry is prone to being "credit-constrained", or by the extent to which it is prone to being "liquidity-constrained". Our main findings are that: (i) the interaction between credit or liquidity constraints and the counter-cyclical real short-term interest rate has a positive, significant, and robust impact on the average annual growth rate of industry labor productivity; (ii) these interaction effects tend to be more significant in recessions than in expansions.

Keywords: growth; tangibility; liquidity dependence; short-term interest rate; counter-cyclicality (search for similar items in EconPapers)
Pages: 59 pages
Date: 2015-02
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:489

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