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Persistent Misallocation and the Productivity Slowdown in EU

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  • Shalini Mitra

Abstract

Why did the productivity slowdown in EU happen at a time of increasing financial market deregulation and generally easing credit conditions? The fact that productivity growth was declining at a time of rising credit is in contrast to the standard prediction of macroeconomic models which find a positive relation between credit and productivity growth. I argue in this paper that if the conventional channel though which such a productivity increase occurs - the reallocation of capital from less to more productive businesses - is impaired, then a decline in credit constraints has the opposite effect in the standard model and aggregate productivity declines. There is in fact ample evidence in the literature to support the impairment of capital reallocation in the EU during this period.

Suggested Citation

  • Shalini Mitra, 2018. "Persistent Misallocation and the Productivity Slowdown in EU," Working Papers 201812, University of Liverpool, Department of Economics.
    • Handle: RePEc:liv:livedp:201812
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    File URL: https://www.liverpool.ac.uk/media/livacuk/schoolofmanagement/research/economics/201812.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    capital misallocation; financial constraints; heterogenous firms; productivity slowdown; aggregate productivity; EU;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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