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Total Factor Productivity and Labor Reallocation: The Case of the Korean 1997 Crisis

  • Benjamin David

    ()

    (State University of New York at Buffalo)

  • Meza Felipe

    ()

    (Instituto Tecnologico Autonomo de Mexico)

In recent research on financial crises, large exogenous shocks to total factor productivity (TFP) are used as the driving force accounting for large output falls. TFP fell 3% after the Korean 1997 financial crisis. We find evidence that the large fall in TFP is mostly due to a sectoral reallocation of labor from the more productive manufacturing and construction sectors to the less productive wholesale trade sector, the public sector and agriculture. We construct a two-sector model that accounts for the labor reallocation. The model has a consumption sector and an investment sector. Firms face sector-specific working capital constraints, which we calibrate with data from financial statements. The rise in interest rates makes inputs more costly. The model accounts for 42% of the TFP fall. The model also accounts for 53% of the fall in GDP. It is broadly consistent with the post-crisis behavior of the Korean economy.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 9 (2009)
Issue (Month): 1 (July)
Pages: 1-41

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Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:31
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  1. Keisuke Otsu, 2008. "A Neoclassical Analysis of The Korean Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 449-471, April.
  2. Timothy J. Kehoe & Kim J. Ruhl, 2008. "Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate," NBER Working Papers 14395, National Bureau of Economic Research, Inc.
  3. Felipe Meza & Erwan Quintin, 2005. "Financial crises and total factor productivity," Center for Latin America Working Papers 0105, Federal Reserve Bank of Dallas.
  4. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc.
  5. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  6. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  7. Restuccia, Diego & Urrutia, Carlos, 2001. "Relative prices and investment rates," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 93-121, February.
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