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

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  • Mark Wright

    (UCLA)

  • Guido Sandleris

    (Universidad Torcuato Di Tella)

Abstract

Financial crises in emerging market countries appear to be very costly: output falls are often dramatic, while a host of partial welfare indicators deteriorate as well. The magnitude of the decline in output is puzzling from an accounting perspective, as factor usage does not decline as much as output, resulting in large falls in measured productivity. Furthermore, if productivity is associated with technology, we have no theory to explain why technology should deteriorate during a crisis. In this paper, we present a framework that allows us to account for observed changes in a country's productivity during a financial crises, and to measure the resulting change in the country's welfare. Specifically, we show how to decompose the change in an economy's measured productivity into changes in the efficiency with which resources are allocated across and within sectors and other factors. This framework allows us to measure the welfare costs of a financial crisis, and to decompose these welfare costs into the contributions from changes in technology, in the efficiency of the resource allocation mechanism, in the efficiency of government spending, and in the terms of trade. We apply this framework to the Argentine crisis of 2001 using a combination of national accounts and establishment level data. We find that more than half of the roughly 11% decline in measured total factor productivity can be accounted for by deteriorations in the allocation of resources both across and within sectors. We measure the decline in welfare to be on the order of 15% of one year GDP.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 900.

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Date of creation: 2011
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Handle: RePEc:red:sed011:900

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Cited by:
  1. Pengfei Wang & Jianjun Miao, 2012. "Sectoral Bubbles and Endogenous Growth," 2012 Meeting Papers 227, Society for Economic Dynamics.
  2. 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.
  3. Basu, Susanto & Pascali, Luigi & Schiantarelli, Fabio, 2013. "Productivity and the Welfare of Nations," The Warwick Economics Research Paper Series (TWERPS) 1027, University of Warwick, Department of Economics.
  4. George Alessandria & Sangeeta Pratap & Vivian Yue, 2013. "Export dynamics in large devaluations," International Finance Discussion Papers 1087, Board of Governors of the Federal Reserve System (U.S.).
  5. Jaume Ventura & Alberto Martin, 2010. "Economic Growth with Bubbles," Working Papers 445, Barcelona Graduate School of Economics.
  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 gd10-177, Institute of Economic Research, Hitotsubashi University.

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