Comments on three papers

Session 2: Financial frictions and within firm performance

BIS-IMF-OECD Joint Conference Weak productivity: The role of financial factors and policies 10-11 January 2018 OECD, Paris Gilbert Cette Banque de France Université d’Aix-Marseille

Content

2

1. Three papers Paper from Romain Duval Gee H. Hong and Yannick Timmer (DHT) Paper from Manarasi and Pierri (MP) Paper from Reint Gropp, Joerg Rocholl and Vahid Saadi (GRS)

2. Two questions 3. Two opposite impacts of financial constraints 4. Financial constraint impact at country level

1. Three papers

3

- Romain Duval Gee H. Hong and Yannick Timmer (DHT thereafter) « Financial Frictions and the Great Productivity Slowdown » - Francesco Manarasi and Nicola Pierri (MP thereafter) « Credit Supply and Firm Productivity Growth » - Reint Gropp, Joerg Rocholl and Vahid Saadi (GRS thereafter) « The Cleansing Effect of Banking Crisis » The three papers are empirical They deal with the topic of the productivity impact of financial constraints Three very interesting and thought- provoking papers Robust but contrasted results

1. Three papers Paper from Romain Duval, Gee Hong and Yannick Timmer (DHT)

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The approach

oMultinational firm level data (ORBIS), 11 advanced economies oCompares productivity growth change from 6 years before to 6 years after

the 2008 financial crisis oOriginal financial vulnerability measurement: share of debt prior to the

crisis that was scheduled to mature during the crisis Main results

oHigher financial vulnerability -> larger TFP slowdown oLarger TFP decline for firms facing a more severe tightening of credit

conditions (ΔCDS from 7 days before to 7 days after LB collapse, country and firm/bank level)

oThrough (at least partly) intangible capital investment Takeaway

oTFP detrimental impact of financial constraints oCould have contributed to post crisis TFP slowdown

1. Three papers Paper from Francesco Manarasi and Nicola Pierri (MP)

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The approach

o Italian firm/bank level data, over 1997-2013 oEstimates impact of credit supply shocks on TFP growth oOriginal credit supply shock using 2007-2009 interbank market freeze

Main results

oCredit crunch -> TFP slowdown oLarger TFP decline for firms with larger debt oLarger TFP decline if banks are more exposed to interbank market freeze oDifferent channels: IT investment, innovation, management practices…

Takeaway

oTFP detrimental impact of financial constraints oCould have contributed to post crisis TFP slowdown

1. Three papers Paper from Reint Gropp, Joerg Rocholl and Vahid Saadi (GRS)

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The approach

oUS metropolitan statistical areas (MSA) data – about 260 MSA – 2007-2014 oOriginal credit constrainst measurement: regulatory forbearance on

distressed banks during the crisis oOriginal instrument: distance from Washington DC oEstimates impact of credit constraints during the crisis (2007-2009) on

. Firm cleansing and job destruction during the crisis

. Firm creation and employment creation after the crisis (2010-2014) Main results

oMore credit constraints during the crisis -> larger cleansing and more job destruction during the crisis -> more firm and employment creation after the crisis -> higher productivity growth after the crisis

Takeaway

oTFP favorable impact of financial constraints

2. Two questions

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Results apparently contrasted

oPaper DHT and MP: TFP detrimental impact of financial constraints Through IT investment, R&D, innovation, management… oPaper GRS: TFP favorable impact of financial constraints Through cleansing mechanisms, and consequently factor allocation Who to believe and do we have to choose?

If the two mecanisms coexist, which one dominates at the macro level?

+ +

?

- -

Financial

constraints

cleansing

mechanisms

Incumbent

firm

productivity

Global

productivity

growth

3. Two opposite impacts of financial constraints

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Large research program at the Banque de France, on these questions

Both on firm level, industry level and country level data On firm and industry level data

P. Aghion, A. Bergeaud, G. Cette, R. Lecat and H. Manghin (ABCLM) oThe two types of impact of financial constraints appear significant on firm

level data . Cleansing mechanisms: positive impact on productivity . Incumbent firms: negative impact on productivity

oFrom this, non-linear productivity global impact of financial constraints on industry level data

3. Two opposite impacts of financial constraints

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On firm and industry level data (ABCLM)

Productivity impact of financial constraints at the industry level: An inversed U curve

3. Two opposite impacts of financial constraints

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On firm and industry level data (ABCLM)

Productivity impact of financial constraints at the industry level: An inversed U curve From high financial dependence industries

Estimate results, 17 industries over 2003-2014

4. The financial constraint impact at the country level

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On country level data

A. Bergeaud, G. Cette and R. Lecat (BCL) oCircular relation between TFP growth and real interest rates

. Real interest rates + factor quality + (institutions, technology) => TFP growth Consistent with an abundant literature, see among numerous papers G. Cette, J. Fernald and B. Mojon (2016)

. TFP growth + other factors (demography …) => GDP growth => real interest rates Consistent with a abundant literature, see among numerous papers M. Marx, B. Mojon and F. Velde (2017)

oWithout technology shocks and adapted institutions, risk of Secular Stagnation

4. The financial constraint impact at the country level

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On country level data (BCL)

o Long term TFP slowdown in all areas

Average annual growth rate of TFP (In %) Smoothed indicator (HP filter, λ = 500) - Whole economy Source: Bergeaud, Cette and Lecat (2016), www.longtermproductivity.com

4. The financial constraint impact at the country level

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On country level data (BCL)

o Long term real interest rate decline in all areas

Real long-term interest rate (In %) - 10-year sovereign bonds Source: OECD

4. Financial constraint impact at country level

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On country level data (BCL)

oCircular relation between TFP growth and real interest rate oCleansing mechanisms dominate Estimate results on 17 countries and annual data over 1950-2016 (control variables omitted)

Explained variable XPGF TXR XPGF TXR

Method Arellano-Bond Lewbel

∆𝒑𝒈𝒇𝒕−𝟏 0.266***

0.279***

[0.049]

[0.047]

∆𝒑𝒈𝒇𝒕 0.061

0.304**

[0.059]

[0.144]

𝑻𝑿𝑹𝒕 0.089***

0.138***

[0.024]

[0.032]

𝑻𝑿𝑹𝒕−𝟏

0.682***

0.653***

[0.052]

[0.044]

4. Financial constraint impact at country level

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On French firm level data

oThe global productivity slowdown comes from a growing productivity level dispersion between firms, itself coming from lower cleansing

French firm productivity level inter-decile and inter-quartile dispersion (D9-D1)/(D9+D1) and (Q3-Q1)/(Q3+Q1) G. Cette, S. Corde and R. Lecat (2017) (CCL)