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Credit Conditions, Dynamic Distortions, and Capital Accumulation in Mexican Manufacturing

Author

Listed:
  • Felipe Meza

    (Instituto Tecnológico Autónomo de Méx)

  • Carlos Urrutia

    (ITAM)

  • Sangeeta Pratap

    (Hunter College and CUNY Graduate Center)

Abstract

The objective of this paper is to document a transmission channel from credit conditions to capital accumulation at a disaggregated level. We use a simple multi-sector model of production and investment to identify investment wedges (i.e., deviations from the optimality condition implied by a stochastic Euler equation). Using a panel of observations at the 4-digit level from the Mexican manufacturing industry, we measure the corresponding dynamic distortions in capital accumulation. Our counterfactual experiments show that the behavior of capital distortions is important to account for changes in the aggregate capital stock over time. We then analyze the sources of these distortions, working with one important candidate: bank credit. We show in a simple model of investment with financial frictions that more availability and cheaper access to credit reduce capital distortions. We find some statistical support for this mechanism in the data.

Suggested Citation

  • Felipe Meza & Carlos Urrutia & Sangeeta Pratap, 2018. "Credit Conditions, Dynamic Distortions, and Capital Accumulation in Mexican Manufacturing," 2018 Meeting Papers 875, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:875
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    References listed on IDEAS

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