Aggregate uncertainty and sectoral productivity growth

The role of credit constraints

Sangyup Choi, Davide Furceri, Yi Huang, Prakash Loungani

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

We show that an increase in aggregate uncertainty—measured by stock market volatility—reduces productivity growth more in industries that depend heavily on external finance. The mechanism at play is that during periods of high uncertainty, firms that are credit constrained switch the composition of investment by reducing productivity-enhancing investment—such as on ICT capital—which is more subject to liquidity risks (Aghion et al., 2010). The effect is larger during recessions, when financing constraints are more likely to be binding, than during expansions. Our statistical method—a difference-in-difference approach using productivity growth of 25 industries from 18 advanced economies over the period 1985–2010—mitigates concerns with omitted variable bias and reverse causality. The results are robust to the inclusion of other sources of interaction effects, instrumental variable approaches, and different datasets. The results also hold if economic policy uncertainty (Baker et al., 2016) is used instead of stock market volatility as a measure of aggregate uncertainty.

Original languageEnglish
Pages (from-to)314-330
Number of pages17
JournalJournal of International Money and Finance
Volume88
DOIs
Publication statusPublished - 2018 Nov 1

Fingerprint

Credit constraints
Industry
Productivity growth
Aggregate uncertainty
Recession
External finance
Omitted variable bias
Uncertainty
Stock market
Policy uncertainty
Productivity
Stock market volatility
Liquidity risk
Difference-in-differences
Credit
Interaction effects
Economic policy
Causality
Instrumental variables
Financing constraints

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

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Aggregate uncertainty and sectoral productivity growth : The role of credit constraints. / Choi, Sangyup; Furceri, Davide; Huang, Yi; Loungani, Prakash.

In: Journal of International Money and Finance, Vol. 88, 01.11.2018, p. 314-330.

Research output: Contribution to journalArticle

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