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Misallocation and the Distribution of Global Volatility

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  • Maya Eden

Abstract

Decreasing returns at the macro level are an outcome of efficiency at the micro level. When inputs are scarce, an efficient economy carries out only the most productive projects; when inputs are abundant, the economy implements less productive projects as well. This link between decreasing returns and efficiency suggests that misallocation can reduce the extent of aggregate decreasing returns. I formalize this connection and establish two main results: (i) misallocation amplifies the volatility of output with respect to fluctuations in inputs; and (ii) financial integration amplifies shocks in relatively distorted economies, but mitigates them in less distorted economies.

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  • Maya Eden, 2017. "Misallocation and the Distribution of Global Volatility," American Economic Review, American Economic Association, vol. 107(2), pages 592-622, February.
    • Handle: RePEc:aea:aecrev:v:107:y:2017:i:2:p:592-622
    Note: DOI: 10.1257/aer.20150314
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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