Collection of Articles on Credit Constraints

Credit Constraints and the Cyclicality of R&D Investment: Evidence from France

We use a French firm-level data set containing 13,000 firms over the period 1994–2004 to analyze the relationship between credit constraints and firms’ R&D behavior over the business cycle. Our main results can be summarized as follows: (i) R&D investment is countercyclical without credit constraints, but it becomes procyclical as firms face tighter credit constraints; (ii) this result is only observed for firms in sectors that depend more heavily upon external finance, or that are characterized by a low degree of asset tangibility; (iii) in more credit-constrained firms, R&D investment plummets during recessions but does not increase proportionally during upturns.

 Authors: Philippe Aghion, Philippe Askenazy, Nicolas Berman, Gilbert Cette, Laurent Eymard

http://onlinelibrary.wiley.com/doi/10.1111/j.1542-4774.2012.01093.x/abstract?deniedAccessCustomisedMessage=&userIsAuthenticated=false

Volatility and growth: Credit constraints and the composition of investment

How does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth? This paper addresses this question within a model where firms engage in two types of investment: a short-term one; and a long-term one, which contributes more to productivity growth. Because it takes longer to complete, long-term investment has a relatively less cyclical return; but it also has a higher liquidity risk. The first effect ensures that the share of long-term investment to total investment is countercyclical when financial markets are perfect; the second implies that this share may turn procyclical when firms face tight credit constraints. A novel propagation mechanism thus emerges: through its effect on the cyclical composition of investment, tighter credit can lead to both higher volatility and lower mean growth. Evidence from a panel of countries provides support for the model's key predictions.

Authors: Philippe Aghiona, George-Marios Angeletosb, Abhijit Banerjeeb, Kalina Manova

http://www.sciencedirect.com/science/article/pii/S0304393210000176

Credit Constraints, Heterogeneous Firms, and International Trade

Financial market imperfections severely restrict international trade flows because exporters require external capital. This article identifies and quantifies the three mechanisms through which credit constraints affect trade: the selection of heterogeneous firms into domestic production, the selection of domestic manufacturers into exporting, and the level of firm exports. I incorporate financial frictions into a heterogeneous-firm model and apply it to aggregate trade data for a large panel of countries. I establish causality by exploiting the variation in financial development across countries and the variation in financial vulnerability across sectors. About 20%–25% of the impact of credit constraints on trade is driven by reductions in total output. Of the additional, trade-specific effect, one-third reflects limited firm entry into exporting, while two-thirds are due to contractions in exporters' sales. Financially developed economies export more in financially vulnerable sectors because they enter more markets, ship more products to each destination, and sell more of each product. These results have important policy implications for less developed nations that rely on exports for economic growth but suffer from weak financial institutions.

Author: Kalina Manova

http://restud.oxfordjournals.org/content/80/2/711.short 

Polarized Business Cycles

We are motivated by four stylized facts computed for emerging and developed economies: (i) business cycle movements are wider in emerging countries; (ii) economies in emerging countries experience greater economic policy uncertainty; (iii) emerging economies are more polarized and less politically stable; and (iv) economic policy uncertainty is positively related to political polarization. We show that a standard real business cycle (RBC) model augmented to incorporate political polarization, a `polarized business cycle' (PBC) model, is consistent with these facts. Our main hypothesis is that fluctuations in economic variables are not only caused by innovations to productivity, as traditionally assumed in macroeconomic models, but also by shifts in political ideology. Switches between left-wing and right-wing governments generate uncertainty about the returns to private investment, and this a ects real economic outcomes. Since emerging economies are more polarized than developed ones, the e ects of political turnover are more pronounced. This translates into higher economic policy uncertainty and ampli es business cycles. We derive our results analytically by fully characterizing the long-run distribution of economic and scal variables. We then analyze the e ect of a permanent increase in polarization on PBCs.

Authors:  Marina Azzimontiy and Matthew Talbertz

http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-44.pdf