Cyclical fiscal policy, credit constraints, and industry growth

What are the effects of cyclical fiscal policy on industry growth? We show that industries with a relatively heavier reliance on external finance or lower asset tangibility tend to grow faster (in terms of both value added and of labor productivity growth) in countries that implement fiscal policies that are more countercyclical. We reach this conclusion using Rajan and Zingales׳s (1998) difference-in-difference methodology on a panel data sample of manufacturing industries across 15 OECD countries over the period 1980–2005. •We study the long-term effects of fiscal policy cyclicality on industry growth.•We run a cross-country cross-sector analysis, which shows that more countercyclical fiscal policies favor sectors with low asset tangibility, and with a high reliance on external capital.•Both effects are more pronounced in downturns than in upturns.