Financial Shocks and TFP L4318Growth

Tiago Severo and Marcello Estevão

No 2010/023, IMF Working Papers from International Monetary Fund

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: WP; external finance; cost of funds; dividend yield; expected return; Business cycles; total factor productivity; financial shocks; sectoral TFP; industry TFP; cost of capital; model relating TFP; market portfolio; returns to scale; total factor productivity growth; relating TFP; production function; Corporate bonds; Productivity; Capital productivity; Bond yields (search for similar items in EconPapers)
Pages: 36
Date: 2010-01-01
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Citations: View citations in EconPapers (4)

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