Financial Shocks, Productivity, and Prices

RePEc Short ID: ple868
ORCID iD: 0000-0002-4520-9778

Hu, Shi; Lenzu, Simone; Rivers, David A.; Tielens, Joris

doi:10.59576/sr.1193

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Financial Shocks, Productivity, and Prices

Abstract: We study the interconnection between the productivity and pricing effects of financial shocks. Combining administrative records on firm-level output prices and quantities with quasi-experimental variation in credit supply, we show that a tightening of credit conditions has a persistent, yet delayed, negative effect on firms’ long-run physical productivity growth (TFPQ) but also induces firms to change their pricing policies. Commonly used revenue-based productivity measures (TFPR)—which conflate price and productivity—offer biased predictions regarding the consequences of financial shocks for firms’ productivity growth, underestimating the long-run elasticity of physical productivity to credit supply by half. We also show that the pricing adjustments themselves have productivity implications. Firms use low pricing as a source of internal financing, allowing them to avoid cutting expenditures on productivity-enhancing activities, thereby softening the impact of financial shocks. We incorporate these forces into a quantitative model of firm dynamics to quantify the importance of productivity and pricing dynamics (and their interplay) in driving the scarring effects of financial crises on aggregate productivity and welfare.

JEL Classification: D22; D24; E31; E44; G01;

https://doi.org/10.59576/sr.1193