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

How has capital reallocation affected productivity growth since the financial crisis? 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 find: (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 reallocation 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.