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On the cost of financial crises


  • Mark Wright


  • Guido Sandleris

    (UTDT and Johns Hopkins University)


Financial crises are costly. In the recent crisis in Argentina, for example, from the onset of sovereign debt repayment difficulties at the end of 2000 until the beginning of 2002, real GDP dropped by almost 20%. A simple aggregate growth accounting exercise suggests that a large part of this decline is related to a fall in total factor productivity. What could cause such a large decline in aggregate productivity? Using a unique dataset that tracks the experiences of individual manufacturing establishments in Argentina during the financial crisis at an annual frequency, this paper examines the hypothesis that the collapse in the Argentine financial sector led to a decline in the efficiency of the resource allocation mechanism. We document that declines in factor utilization levels only explain a portion of the decrease in total factor productivity, and that there is evidence that the efficiency of resource allocation deteriorated. We conclude by quantifying the extent to which this decline in allocative efficiency explains the decline in aggregate output and productivity.

Suggested Citation

  • Mark Wright & Guido Sandleris, 2008. "On the cost of financial crises," 2008 Meeting Papers 180, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:180

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