Financial Constraints, Interest Rates and Productivity Growth
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Gita Gopinath, Harvard University
Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis
AbstractWe quantify the role of financial factors that have contributed to sluggish investment in Europe in the aftermath of the 2008–2009 crisis. Using a big data approach, we match the firms to their banks based on banking relationships in 8 European countries over time, obtaining over 2 million observations. We document four stylized facts. First, the decline in investment in the aftermath of the crisis can be linked to higher leverage, increased debt service, and having a relationship with a weak bank—once we condition on aggregate demand shocks. Second, the relation between leverage and investment depends on the maturity structure of debt: firms with a higher share of long-term debt have higher investment rates since the rollover risk for those firms is lower. Third, the negative effect of leverage is more pronounced when firms are linked to weak banks with high exposure to sovereign risk. Firms with higher shares of short-term debt who are linked to weak banks decrease investment even more. This result suggests that loan evergreening by weak banks played a limited role. Fourth, the direct negative effect of weak banks on the average firm’s investment disappears once demand shocks are controlled for, although the differential effects with respect to leverage and the maturity of debt remain.
Macroeconomic Policy, Product Market Competition, and Growth: The Intangible Investment Channel
AbstractWhile there is growing evidence of persistent or even permanent output losses from financial crises, the causes remain unclear. One candidate is intangible capital—a rising driver of economic growth that, being non-pledgeable as collateral, is also vulnerable to financial frictions. By sheltering intangible investment from financial shocks, counter-cyclical macroeconomic policy could thus strengthen longer-term growth, particularly so where strong product market competition prevents firms from self-financing their investments through rents. Using a rich cross-country firm-level dataset and exploiting heterogeneity in firm-level exposure to the sharp and unforeseen tightening of credit conditions around September 2008, we find strong support for these theoretical predictions. The quantitative implications are large, highlighting a powerful stabilizing role for macroeconomic policy through the intangible investment channel, and its complementarity with pro-competition product market deregulation.
The Inverted-U Relationship between Credit Access and Productivity Growth
AbstractThe last few decades have seen a sharp structural slowdown in growth in hourly labour productivity and TFP in advanced economies. An analysis of individual firm-level data for France shows that this deceleration in productivity growth has been accompanied by an increasing dispersion in productivity levels across companies, suggesting a weakening of the usual cleansing mechanisms. One factor common to all advanced economies over the period is the downward trend in real long-term interest rates. Using multinational macroeconomic data and individual firm-level data for France, we test for the existence of two contradictory effects caused by the fall in long-term rates and in financial constraints: on the one hand, a reduction in cleansing mechanisms, leading to slower productivity growth and, on the other, cheaper financing for innovation, leading to an acceleration in productivity growth. Our findings show that, in the recent period, the latter effect appears to have been outweighed by the former. Moreover, both effects are amplified when firms are financially constrained or operate in sectors facing higher financial constraints. One implication of this is that the favourable impact of the digital revolution on productivity growth could in fact be amplified by the accompanying rise in real interest rates as this would increase the cleansing effect.
Bank of Italy
- O4 - Economic Growth and Aggregate Productivity
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit