Financial Frictions and the Great Productivity Slowdown

By Romain A Duval, Gee Hee Hong, Yannick Timmer

May 31, 2017

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Romain A Duval, Gee Hee Hong, and Yannick Timmer. Financial Frictions and the Great Productivity Slowdown, (USA: International Monetary Fund, 2017) 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

We study the role of financial frictions in explaining the sharp and persistent productivity growth slowdown in advanced economies after the 2008 global financial crisis. Using a rich cross-country, firm-level data set and exploiting quasi-experimental variation in firm-level exposure to the crisis, we find that the combination of pre-existing firm-level financial fragilities and tightening credit conditions made an important contribution to the post-crisis productivity slowdown. Specifically: (i) firms that entered the crisis with weaker balance sheets experienced decline in total factor productivity growth relative to their less vulnerable counterparts after the crisis; (ii) this decline was larger for firms located in countries where credit conditions tightened more; (iii) financially fragile firms cut back on intangible capital investment compared to more resilient firms, which is one plausible way through which financial frictions undermined productivity. All of these effects are highly persistent and quantitatively large—possibly accounting on average for about a third of the post-crisis slowdown in within-firm total factor productivity growth. Furthermore, our results are not driven by more vulnerable firms being less productive or having experienced slower productivity growth before the crisis, or differing from less vulnerable firms along other dimensions.

Subject: Credit, Credit default swap, Financial crises, Money, Production, Productivity, Total factor productivity

Keywords: Balance sheet vulnerability, Credit, Credit condition, Credit constraint, Credit default swap, Endogenous Growth., Financial Friction, Financial Vulnerability, Firm age, Firm distribution, Global, Global Financial Crisis, Intangible Investment, Productivity, Productivity slowdown, TFP gap, TFP growth, TFP Growth Pre, TFP slowdown, Total factor productivity, U.S firm, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/129
Stock No:

WPIEA2017129
ISBN:

9781484300701
ISSN:

1018-5941

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