Debt of Nonfinancial Corporations and Economic Growth

The recent financial and economic crisis has put considerable strains not only on public but also on private finances. In the paper we analyse the development of nonfinancial corporate debt (measured as liabilities minus shares and other equities) in the time period 1995-2010 for 17 European OECD countries. In growth equations the dependent variable is the growth rate of real GDP per head and forward moving averages of this growth rate. Descriptive statistics reveal that in the examined period the nonfinancial corporations' debt has been rising steadily (first of all in Sweden, the Netherlands and Portugal). The basic estimation technique has been panel fixed effects corrected for heteroscedasticity and autocorrelation. The coefficients showing the impacts of corporate debt on GDP growth have had the sign minus and have been highly statistically significant. A 10 percentage point increase in nonfinancial corporations' debt has been associated with an approximately 5 basis point reduction in per head real GDP growth. We have used also cross-section specific and period specific coefficients to gain a more profound look into the matter.

Keywords: economic growth, fixed effects model, nonfinancial corporation debt, financial balance sheets