Old Wine in a New Bottle: Are Financial Variables Omitted Variables in the Production Function?

Abstract

This paper examines the role of financial variables in the production function by making use of nonlinear regressions along with panel data techniques and a G7 data panel set. It offers a non-linear GMM estimator that makes use of instruments that exploit information from the levels of the variables in the production function, while it uses both one-level and two-level bootstraps to check whether the estimates are supported by the data. The results suggest that both money and credit aggregates enter significantly the aggregate production function as an input, indicating that both variables seem to facilitate the process of production.