Working Paper: CEPR ID: DP7359
Authors: Philippe Aghion; David Hemous; Enisse Kharroubi
Abstract: This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long-term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing firms' market size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long-term projects, and the more so in sectors that rely more on external financing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical fiscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external finance or lower asset tangibility.
Keywords: countercyclicality; financial dependence; fiscal policy; growth
JEL Codes: E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| countercyclical fiscal policy (E62) | value-added growth (O49) |
| countercyclical fiscal policy (E62) | productivity growth (O49) |
| countercyclical fiscal policy (E62) | R&D expenditure (O32) |
| countercyclical fiscal policy (E62) | investment in long-term projects (G31) |
| investment in long-term projects (G31) | industry growth metrics (L16) |
| countercyclical fiscal policy (E62) | market size (L25) |