Productivity growth, capital reallocation and the financial crisis: evidence from Europe and the US

Abstract

Has productivity growth been held back by impaired capital reallocation since the financial crisis? Have low interest rates disrupted the reallocation process? This paper calculates the effect on productivity growth of capital reallocation between industries. It uses an accounting framework, due to Jorgenson and his co-authors, that computes the contribution of capital services to productivity growth relative to a counter-factual of a well-functioning financial system. Using data from 11 countries (the major EU economies plus the US), in 1997-2013, we find: (a) the contribution of reallocation to productivity growth has generally fallen in most economies since the 2000s, notably in Mediterranean countries and fell sharply in many countries in the financial crisis years (b) reallocation is impaired in countries with more uncertainty and where banks hold less regulatory capital and (c) more reallocation is correlated with lower real interest rates, contrary to the hypothesis that low real interest rates have hurt reallocation.