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The Costs of Financial Crises: Resource Misallocation, Productivity and Welfare in the 2001 Argentine Crisis

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  • Guido Sandleris
  • Mark L.J. Wright

Abstract

Financial crises in emerging market countries appear to be very costly: both output and a host of partial welfare indicators decline dramatically. The magnitude of these costs is puzzling both from an accounting perspective -- factor usage does not decline as much as output, resulting in large falls in measured productivity -- and from a theoretical perspective. Towards a resolution of this puzzle, we present a framework that allows us to (i) account for changes in a country's measured productivity during a financial crises as the result of changes in the underlying technology of the economy, the efficiency with which resources are allocated across sectors, and the efficiency of the resource allocation within sectors driven both by reallocation amongst existing plants and by entry and exit; and (ii) measure the change in the country's welfare resulting from changes in productivity, government spending, the terms of trade, and a country's international investment position. We apply this framework to the Argentine crisis of 2001 using a unique establishment level data-set and find that more than half of the roughly 10% decline in measured total factor productivity can be accounted for by deterioration in the allocation of resources both across and within sectors. We measure the decline in welfare to be on the order of one-quarter of one years GDP.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17552.

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Date of creation: Oct 2011
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Publication status: published as Guido Sandleris & Mark L. J. Wright, 2014. "The Costs of Financial Crises: Resource Misallocation, Productivity, and Welfare in the 2001 Argentine Crisis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 87-127, 01.
Handle: RePEc:nbr:nberwo:17552

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Citations

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Cited by:
  1. Alberto Martin & Jaume Ventura, 2012. "Economic Growth with Bubbles," American Economic Review, American Economic Association, American Economic Association, vol. 102(6), pages 3033-58, October.
  2. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the welfare of nations," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1312, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Jianjun Miao & PENGFEI WANG, 2011. "Sectoral Bubbles and Endogenous Growth," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2011-032, Boston University - Department of Economics.
  4. George Alessandria & Sangeeta Pratap & Vivian Yue, 2013. "Export dynamics in large devaluations," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1087, Board of Governors of the Federal Reserve System (U.S.).
  5. 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.
  6. Kyoji Fukao & Tsutomu Miyagawa & Hak K. Pyo & Keun Hee Rhee, 2011. "Estimates of Total Factor Productivity, the Contribution of ICT, and Resource Reallocation Effects in Japan and Korea," Global COE Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University gd10-177, Institute of Economic Research, Hitotsubashi University.

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