IMF Working Papers

Firm Leverage and Boom-Bust Cycles

By Can Sever

June 16, 2023

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Can Sever. Firm Leverage and Boom-Bust Cycles, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper explores the dynamic relationship between firm debt and real outcomes using data from 24 European economies over the period of 2000-2018. Based on macro data, it shows that a rise in credit to firms is associated with an increase in employment growth in the short-term, but employment growth declines in the medium-term. This pattern remains similar, even when the changes in credit to households are accounted for. Next, using data from a large sample of firms, it shows that firm leverage buildups predict similar boom-bust growth cycles in firm employment: Firms with a larger increase in leverage experience a boost in employment growth in the short-term, but employment growth decreases in the medium-term. Relatedly, the volatility of employment growth increases in the aftermath of firm leverage buildups. Finally, this paper provides suggestive evidence on the role of a financial channel in the relationship between firm leverage buildups and employment growth. The results show that a rise in firm leverage is associated with a persistently higher debt service ratio, pointing the drag on finances. Consistently, boom-bust growth cycles in the aftermath of firm leverage buildups are not limited to employment growth, but are also pronounced for investment. Moreover, the medium-term decline in firm employment growth as predicted by leverage buildups becomes even larger if aggregate financial conditions tighten. The findings are in favor of “lean against the wind” approach in policy making.

Subject: Business cycles, Consumer credit, Credit, Credit booms, Economic growth, Employment, Labor, Money

Keywords: Boom-bust cycles, Business cycles, Consumer credit, Credit, Credit booms, Cycles in the aftermath, Employment, Employment growth, Europe, Firm debt, Firm leverage, Global, Growth cycle, Household debt, Investment, Leverage buildup, Leverage cycle, Leverage cycles, ORBIS

Publication Details

  • Pages:

    39

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/126

  • Stock No:

    WPIEA2023126

  • ISBN:

    9798400245282

  • ISSN:

    1018-5941