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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 dataset and find that more than half of the roughly 10% 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 one-quarter of one years GDP.

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Bibliographic Info

Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2011-04.

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Length: 54 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:udt:wpbsdt:2011-04

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Cited by:
  1. Alberto Martin & Jaume Ventura, 2012. "Economic Growth with Bubbles," American Economic Review, American Economic Association, vol. 102(6), pages 3033-58, October.
  2. 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.
  3. 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.
  4. Pengfei Wang & Jianjun Miao, 2012. "Sectoral Bubbles and Endogenous Growth," 2012 Meeting Papers 227, Society for Economic Dynamics.
  5. 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.
  6. Vivian Yue & Sangeeta Pratap & George Alessandria, 2012. "Export Dynamics in Large Devaluations," 2012 Meeting Papers 983, Society for Economic Dynamics.

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