Financial conditions and economic growth

This paper relates cross-country growth in real gross domestic product (RGDP) to ex-ante financial distress. For each of the 45 countries covered in the study, we first develop country indices of ex-ante financial distress from firm-level data and then employ an autoregressive model to examine the short and long-run implications of ex-ante financial distress on RGDP. The econometric analysis of over 590,000 firm-year observations over the period 1987–2011/2014 reveals that ex-ante financial distress has a strong negative relationship with growth in RGDP. In particular, we find that ex-ante financial distress lowers growth in RGDP in the short run and this effect persists in the long run. The short-run impact is valid across alternative weights used in the constructed country-level indices. In addition, a standard deviation increase in financial distress generates 0.11 standard deviation decrease in economic growth.