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On the cost of financial crises

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Author Info

  • Mark Wright

    (UCLA)

  • Guido Sandleris

    (UTDT and Johns Hopkins University)

Abstract

Financial crises are costly. In the recent crisis in Argentina, for example, from the onset of sovereign debt repayment difficulties at the end of 2000 until the beginning of 2002, real GDP dropped by almost 20%. A simple aggregate growth accounting exercise suggests that a large part of this decline is related to a fall in total factor productivity. What could cause such a large decline in aggregate productivity? Using a unique dataset that tracks the experiences of individual manufacturing establishments in Argentina during the financial crisis at an annual frequency, this paper examines the hypothesis that the collapse in the Argentine financial sector led to a decline in the efficiency of the resource allocation mechanism. We document that declines in factor utilization levels only explain a portion of the decrease in total factor productivity, and that there is evidence that the efficiency of resource allocation deteriorated. We conclude by quantifying the extent to which this decline in allocative efficiency explains the decline in aggregate output and productivity.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 180.

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Date of creation: 2008
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Handle: RePEc:red:sed008:180

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Cited by:
  1. Francisco J. Buera & Benjamin Moll, 2012. "Aggregate Implications of a Credit Crunch," NBER Working Papers 17775, National Bureau of Economic Research, Inc.
  2. Michael Peters, 2011. "Heterogeneous Mark-Ups and Endogenous Misallocation," 2011 Meeting Papers, Society for Economic Dynamics 78, Society for Economic Dynamics.

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