Financial conditions and economic growth

John Inekwe, Yi Jin and Maria Rebecca Valenzuela

International Review of Economics & Finance, 2019, vol. 61, issue C, 128-140

Abstract: This paper relates cross-country growth in real gross domestic product (RGDP) to ex-ante financial distress. For each of the 45 countries covered in the study, we first develop country indices of ex-ante financial distress from firm-level data and then employ an autoregressive model to examine the short and long-run implications of ex-ante financial distress on RGDP. The econometric analysis of over 590,000 firm-year observations over the period 1987–2011/2014 reveals that ex-ante financial distress has a strong negative relationship with growth in RGDP. In particular, we find that ex-ante financial distress lowers growth in RGDP in the short run and this effect persists in the long run. The short-run impact is valid across alternative weights used in the constructed country-level indices. In addition, a standard deviation increase in financial distress generates 0.11 standard deviation decrease in economic growth.

Keywords: Finance; Distress; Risk; Panel; Economic growth (search for similar items in EconPapers)
JEL-codes: E23 E44 O16 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:61:y:2019:i:c:p:128-140

DOI: 10.1016/j.iref.2019.02.001

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