Aghion, P., Bergeaud, A., Cette, G., Lecat, R. and Maghin, H. (2019), Economica, 86: 1-31.
Gilbert Cette is Deputy Director, International Studies and Relations at the Banque de France and Associate Professor at Aix-Marseille School of Economics. He obtained his Ph.D in 1989 at the University of Paris 1. He is investigating empirically growth, productivity, innovations, labor and structural reforms.
The research program
What is the impact of credit access tightness on productivity? We emphasize the coexistence of two opposite effects. The overall relationship between credit access and productivity takes the shape of an inverted-U. More widely, understanding interactions between financial constraints and productivity growth can contribute to the debate on secular stagnation and point to a way out of low growth.
Rising credit constraints are usually shown to have a direct detrimental effect on productivity growth. By increasing the cost of financing, they make it more difficult to invest in R&D, ICT or intangible capital, which are assets with a potentially strong long-run impact on productivity.
However, rising financial constraints can also have a positive effect on aggregate economic productivity. This second channel is the consequence of production factor misallocation: an increase in financial constraints boosts the mechanism through which less productive firms exit the market (cleansing). A recent empirical literature has argued that the low real interest rates and easy credit access prevailing before the financial crisis might partly explain the productivity slowdown experienced in developed countries, especially in southern Europe.
In our paper, we develop a simple theoretical model of firm dynamics and innovation-led growth under credit constraints, to formally reconcile the two channels highlighted above, and test this theoretical prediction against the data. Our empirical strategy relies on a rich dataset built by the Bank of France on French manufacturing firms. It provides both standard accounting information (balance sheet and income statement) and information on an additional variable called “Cotation” which rates firms according to their financial strength and capacity to meet their financial commitments. This rating is updated every year and has been shown to be a good proxy for firms’ credit access and financial costs. We therefore first aggregate growth and credit at the sector level. We regress sectoral productivity growth on a sectoral measure of credit constraint - namely the difference between the average rate of new loans to firms in the sector and a reference rate, controlling for sector fixed effects. We find some evidence of an inverted-U relationship between credit constraints and productivity growth.
Turning to the firm-level analysis, we perform two separate exercises. We first show that firms whose rating increases are positively impacted in their future productivity performance. We then use a survival model to show that a better rating is also associated with lower exit rates, particularly for the least productive firms, which can have a detrimental effect on aggregate productivity. To deal with potential endogeneity issues, we exploit a policy change, namely the 2012 Eurosystem's Additional Credit Claims (ACC) program, which extended the set of loans eligible for banks' refinancing with the Eurosystem. Exploiting this discontinuity confirms all our results: incumbent firms directly affected by this ACC program experienced both an upward jump in productivity growth post-ACC and lower exit rates, particularly those least productive before the introduction of the ACC program.
Our analysis has implications for the debate on secular stagnation. In most advanced economies, both real long-term interest rates and productivity growth have decreased since the early 1990s. We are now exploring the mechanism whereby a circular relationship links these two indicators. Failing a technology shock, this circular relationship can only converge to an equilibrium where growth and interest rates are both low.