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Credit Constraints, Cyclical Fiscal Policy and Industry Growth

  • Philippe Aghion
  • David Hemous
  • Enisse Kharroubi

This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long-term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing firms' market size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long-term projects, and the more so in sectors that rely more on external financing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical fiscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external finance or lower asset tangibility.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15119.

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Date of creation: Jun 2009
Date of revision:
Publication status: published as Cyclical fiscal policy, credit constraints, and industry growth ☆ Philippe Aghiona, David Hemousa, Enisse Kharroubib, Journal of Monetary Economics Available online 29 January 2014
Handle: RePEc:nbr:nberwo:15119
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