DP13972 Productivity Growth, Capital Reallocation and the Financial Crisis: Evidence from Europe and the US
How has capital reallocation affected productivity growth since the financial cri-
sis? For example, 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 one where rates of return are equalised between sectors: if capital persists in the
low return sectors, the reallocation measure falls. Using data from 11 countries (the
major EU economies plus the US), in 1997-2013, we nd: (a) the contribution of
capital reallocation to productivity growth is lower in most economies after than
before the financial crisis, notably in Mediterranean countries; (b) more capital real-
location is correlated with lower real interest rates, contrary to the hypothesis that
low real interest rates have hurt capital reallocation; (c) controlling for shocks, lower
capital reallocation is associated with lower optimism, and weaker financial systems.
