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Growth effects of corporate balance sheet adjustments in the EU

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  • Romanos Priftis

    (Bank of Canada)

  • Anastasia Theofilakou

    (University of Athens)

Abstract

This paper investigates the impact of active balance sheet adjustments in the non-financial corporate sector on economic growth in the EU. We jointly model firms’ ability to reduce their balance sheet imbalances and a growth equation in an instrumental variables (IV) panel context. This enables us to explicitly consider the contemporaneous interaction between corporate balance sheet adjustment and growth, which can otherwise bias inference. Our main findings inter alia suggest that periods of active corporate deleveraging are associated on average with lower output growth compared to periods when no adjustment takes place. Moreover, a decline in corporate debt overhang supports output growth. Model-based simulations are in line with these findings.

Suggested Citation

  • Romanos Priftis & Anastasia Theofilakou, 2021. "Growth effects of corporate balance sheet adjustments in the EU," Empirical Economics, Springer, vol. 60(2), pages 773-801, February.
    • Handle: RePEc:spr:empeco:v:60:y:2021:i:2:d:10.1007_s00181-019-01769-3
    DOI: 10.1007/s00181-019-01769-3
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    More about this item

    Keywords

    Corporate deleveraging; Growth effects; IV estimation; European union;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G2 - Financial Economics - - Financial Institutions and Services

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