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Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises

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  • Sangeeta Pratap

    (Hunter College, City University of New York)

  • Carlos Urrutia

    (ITAM)

Abstract

Financial crises in emerging economies are accompanied by a large fall in total factor productivity. We explore the role of financial frictions in exacerbating the misallocation of resources and explaining this drop in TFP. We build a two-sector model of a small open economy with a working capital constraint on the purchase of intermediate goods. The model is calibrated to Mexico before the 1995 crisis and subjected to an unexpected shock to interest rates. The financial friction generates an endogenous fall in TFP and output and can explain more than half of the fall in TFP and 74 percent of the fall in GDP per worker. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2011.09.003
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 15 (2012)
Issue (Month): 3 (July)
Pages: 336-358

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Handle: RePEc:red:issued:10-192

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Related research

Keywords: Financial crises; Total factor productivity; Financial frictions;

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References

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  1. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report 335, Federal Reserve Bank of Minneapolis.
  2. Elias Brandt & Scott Dressler & Erwan Quintin, 2004. "The real impact of financial crises," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, pages 1-15.
  3. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
  4. Pratap, Sangeeta & Lobato, Ignacio & Somuano, Alejandro, 2003. "Debt composition and balance sheet effects of exchange rate volatility in Mexico: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 450-471, December.
  5. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2001. "A Decade Lost and Found: Mexico and Chile in the 1980s," Documentos de Trabajo 110, Centro de Economía Aplicada, Universidad de Chile.
  6. Sangeeta Pratap & Erwan Quintin, 2010. "Financial Crises and Labor Market Turbulence," Economics Working Paper Archive at Hunter College 428, Hunter College Department of Economics.
  7. Sangeeta Pratap & Carlos Urrutia, 2004. "Firm Dynamics, Investment and Debt Portfolio: Balance Sheet Effects of the Mexican Crisis of 1994," 2004 Meeting Papers 462, Society for Economic Dynamics.
  8. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises," Research Department Publications 4474, Inter-American Development Bank, Research Department.
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  12. Francisco J. Buera & Joseph Kaboski & Yongseok Shin, 2009. "Finance and Development: A Tale of Two Sectors," NBER Working Papers 14914, National Bureau of Economic Research, Inc.
  13. Meza, Felipe & Urrutia, Carlos, 2011. "Financial liberalization, structural change, and real exchange rate appreciations," Journal of International Economics, Elsevier, vol. 85(2), pages 317-328.
  14. Diego Restuccia & Richard Rogerson, 2007. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," NBER Working Papers 13018, National Bureau of Economic Research, Inc.
  15. Lama, Ruy & Urrutia, Carlos, 2012. "Employment Protection and Business Cycles in Emerging Economies," Working Papers 2012-003, Banco Central de Reserva del Perú.
  16. Felipe Meza & David Benjamin, 2007. "Total Factor Productivity and Labor Reallocation: The Case of the Korean 1997 Crisis," 2007 Meeting Papers 157, Society for Economic Dynamics.
  17. Kehoe, Timothy J. & Ruhl, Kim J., 2009. "Sudden stops, sectoral reallocations, and the real exchange rate," Journal of Development Economics, Elsevier, vol. 89(2), pages 235-249, July.
  18. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Decades lost and found: Mexico and Chile since 1980," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-30.
  19. Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October.
  20. Meza Felipe & Quintin Erwan, 2007. "Factor Utilization and the Real Impact of Financial Crises," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-41, September.
  21. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-66, December.
  22. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Data Appendix to A Decade Lost and Found: Mexico and Chile in the 1980s," Technical Appendices bergoeing02, Review of Economic Dynamics.
  23. Felipe Schwartzman, 2010. "Time to produce and emerging market crises," Working Paper 10-15, Federal Reserve Bank of Richmond.
  24. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, vol. 78(1), pages 95-113, October.
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Citations

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Cited by:
  1. Felipe Meza & Carlos Urrutia, 2008. "Great Appreciations: Accounting for the Real Exchange Rate in Mexico, 1988-2002," Working Papers 0807, Centro de Investigacion Economica, ITAM.
  2. Felipe Schwartzman, 2010. "Time to produce and emerging market crises," Working Paper 10-15, Federal Reserve Bank of Richmond.
  3. Uras, Burak R., 2014. "Corporate financial structure, misallocation and total factor productivity," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 177-191.
  4. Diego Restuccia & Richard Rogerson, 2012. "Misallocation and Productivity," Working Papers tecipa-468, University of Toronto, Department of Economics.
  5. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2009. "On the cyclicality of the interest rate in emerging economy models: solution methods matter," Working Paper 09-13, Federal Reserve Bank of Richmond.
  6. Ezra Oberfield, 2013. "Productivity and Misallocation During a Crisis: Evidence from the Chilean Crisis of 1982," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 100-119, January.
  7. Kaoru Hosono & Miho Takizawa, 2012. "Do Financial Frictions Matter as a Source of Misallocation? Evidence from Japan," Discussion papers ron246, Policy Research Institute, Ministry of Finance Japan.
  8. Queraltó, Albert, 2013. "A Model of Slow Recoveries from Financial Crises," International Finance Discussion Papers 1097, Board of Governors of the Federal Reserve System (U.S.).

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