IMF Working Papers

Financial Shocks and TFP L4318Growth

By Tiago Severo, Marcello M. Estevão

January 1, 2010

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Tiago Severo, and Marcello M. Estevão Financial Shocks and TFP L4318Growth, (USA: International Monetary Fund, 2010) accessed November 21, 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

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.

Subject: Bond yields, Capital productivity, Corporate bonds, Financial institutions, Production, Productivity, Total factor productivity

Keywords: Bond yields, Business cycles, Capital productivity, Corporate bonds, Cost of capital, Cost of funds, Dividend yield, Expected return, External finance, Financial shocks, Industry TFP, Market portfolio, Model relating TFP, Production function, Productivity, Relating TFP, Returns to scale, Sectoral TFP, Total factor productivity, Total factor productivity growth, WP

Publication Details

  • Pages:

    36

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2010/023

  • Stock No:

    WPIEA2010023

  • ISBN:

    9781451962376

  • ISSN:

    1018-5941

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