Aggregate Uncertainty and Sectoral Productivity Growth: The Role of Credit Constraints

By Sangyup Choi, Davide Furceri, Yifei Huang, Prakash Loungani

August 16, 2016

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Sangyup Choi, Davide Furceri, Yifei Huang, and Prakash Loungani. Aggregate Uncertainty and Sectoral Productivity Growth: The Role of Credit Constraints, (USA: International Monetary Fund, 2016) accessed December 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We show that an increase in aggregate uncertainty—measured by stock market volatility—reduces productivity growth more in industries that depend heavily on external finance. This effect is larger during recessions, when financing constraints are more likely to be binding, than during expansions. Our statistical method—a difference-in-difference approach using productivity growth for 25 industries for 18 advanced economies over the period 1985-2010—mitigates concerns with omitted variable bias and reverse causality. The results are robust to the inclusion of other sources of interaction effects, such as financial development (Rajan and Zingales, 1998) and counter-cyclical fiscal policy (Aghion et al., 2014). The results also hold if economic policy uncertainty (Baker et al., 2015) is used instead of stock market volatility as the measure of aggregate uncertainty.

Subject: Financial markets, Labor productivity, Output gap, Production, Productivity, Stock markets, Total factor productivity

Keywords: Aggregate productivity shock, Differential effect, Differential effect in TFP growth, Expected TFP growth, External finance, Financial dependence, Global, Growth rate, Industry TFP, Industry TFP growth remains of the sign, Labor productivity, Output gap, Productivity, Productivity growth, Productivity-enhancing investment, Productivity-enhancing reallocation, Sectoral productivity growth, Sectoral TFP growth, Stock markets, TFP growth, TFP growth change, Total factor productivity, Uncertainty, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/174
Stock No:

WPIEA2016174
ISBN:

9781475526370
ISSN:

1018-5941

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