Growth Effects of Corporate Balance Sheet Adjustments in the EU: An Econometric and Model-based Assessment

Romanos Priftis and Anastasia Theofilakou

No 76, European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: This paper investigates the impact of active balance sheet adjustments in the non-financial corporate sector on economic growth in the EU. We first jointly model firms' ability to reduce their balance sheet imbalances and a growth equation in an instrumental variables (IV) panel context. This enables us to explicitly consider the contemporaneous interaction between corporate balance sheet adjustment and growth, which can otherwise bias inference. Our main findings inter alia suggest that: i) periods of active corporate deleveraging are associated on average with lower output growth compared to periods when no adjustment takes place, and ii) a decline in corporate debt overhang supports output growth. To explore the deleveraging mechanism qualitatively we then employ a banking variant of the Commission's QUEST model and show that following a deleveraging shock, triggered by a tightening of firms' collateral constraints, the effects on investment and GDP are negative in the short-run. In the medium run once corporate debt has been reduced the effects fade away allowing the economy to recover. In the long run the effects are largely neutral suggesting that the source of investment financing, be it financial intermediaries or the stock market, does not seem to matter.

JEL-codes: C3 E21 G2 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2018-01
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-fdg and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://economy-finance.ec.europa.eu/publications/ ... -based-assessment_en (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:euf:dispap:076

Access Statistics for this paper

More papers in European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission Contact information at EDIRC.
Bibliographic data for series maintained by ECFIN INFO ().