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Shocks, Financial Dependence, and Efficiency

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  • Marcello M. Estevão
  • Tiago Severo

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 effect is, however, non-monotonic across sectors with different degrees of dependence on external finance. Our findings 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. The paper presents a theoretical model that produces the observed non-monotonic effect of financial shocks on TFP growth and suggests that financial shocks distort the allocation of factors across firms even within an industry, thus reducing TFP growth.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/199.

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Length: 40
Date of creation: 01 Aug 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/199

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Related research

Keywords: External shocks; Industrial sector; calibration; equation; total factor productivity; probability; linear model; growth rate; business cycle; economic growth; correlation; predictions; business cycles; time series; random variable; standard deviation; real business cycle; equations; statistics; regression equation; probabilities; calibrations; growth rates; dummy variable; growth model; real business cycle theory; optimization; business cycle theory; quadratic equation; survey; endogenous growth theory; descriptive statistics; covariance; prediction; principal components analysis; arithmetic; sensitivity analysis; statistical significance;

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References

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  1. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," NBER Working Papers 2511, National Bureau of Economic Research, Inc.
  2. Matias Braun & Borja Larrain, 2004. "Finance and the Business Cycle: International, Inter-industry Evidence," Finance, EconWPA 0403001, EconWPA.
  3. Pablo A. Neumeyer & Fabrizio Perri, 2001. "Business Cycles in Emerging Economies:The Role of Interest Rates," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 01-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Francisco Arizala & Eduardo Cavallo & Arturo Galindo, 2009. "Financial Development and TFP Growth: Cross-Country and Industry-Level Evidence," Research Department Publications, Inter-American Development Bank, Research Department 4630, Inter-American Development Bank, Research Department.
  5. Timothy Kehoe & Edward Prescott, 2002. "Data Appendix to Great Depressions of the Twentieth Century," Technical Appendices, Review of Economic Dynamics kehoe02, Review of Economic Dynamics.
  6. Timothy J. Kehoe & Edward C. Prescott (), 2007. "Great depressions of the twentieth century," Monograph, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, number 2007gdott.
  7. J. Bradford De Long, 1990. ""Liquidation" Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression," NBER Working Papers 3546, National Bureau of Economic Research, Inc.
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