Total Factor Productivity and Labor Reallocation: The Case of the Korean 1997 Crisis
Detrended Total Factor Productivity (TFP), net of changes in capital utilization, fell by 3.3% after the Korean 1997 financial crisis. We construct a small open economy model that accounts for 30.0% of the fall in response to a sudden stop of capital inflows and an increase in international interest rates. Empirically, the fall in TFP follows a reallocation of labor from the more productive manufacturing sector to the less productive agriculture and public sectors. The model has a consumption and an investment sector. The reallocation of labor in the data corresponds to a reallocation from the investment sector to the consumption sector. In the model, a sudden stop raises the costs of imports, which are used as an input in the investment sector. Investment falls sharply in response to the increase in interest rates. A fall in export demand and working capital requirements amplify the effects of the sudden stop.
|Date of creation:||2007|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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- 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.
- Kehoe, Timothy J. & Ruhl, Kim J., 2009. "Sudden stops, sectoral reallocations, and the real exchange rate," Journal of Development Economics, Elsevier, vol. 89(2), pages 235-249, July.
- Timothy J. Kehoe & Kim J. Ruhl, 2008. "Sudden stops, sectoral reallocations, and the real exchange rate," Staff Report 414, Federal Reserve Bank of Minneapolis.
- Felipe Meza & Erwan Quintin, 2005. "Financial crises and total factor productivity," Center for Latin America Working Papers 0105, Federal Reserve Bank of Dallas.
- 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.
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