Working Paper: CEPR ID: DP10826
Authors: Gita Gopinath; Sebnem Kalemli-Ozcan; Loukas Karabarbounis; Carolina Villegas-Sanchez
Abstract: Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing firms in Spain between 1999 and 2012 to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor, and a significant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent financial frictions that generates firm-level behavior similar to the behavior observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a significant decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.
Keywords: capital flows; dispersion; Europe; misallocation; productivity
JEL Codes: D24; E22; F41; O16; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in real interest rate (E43) | increase in the dispersion of the return to capital (D29) |
| decline in real interest rate (E43) | decline in total factor productivity (TFP) (O49) |
| capital misallocation (E22) | decline in total factor productivity (TFP) (O49) |
| increase in the dispersion of the return to capital (D29) | capital misallocation (E22) |
| capital misallocation (E22) | significant productivity losses (J17) |
| financial market development context (O16) | mediating role in capital misallocation and TFP (D24) |