Working Paper: CEPR ID: DP9591
Authors: Ricardo Reis
Abstract: Between 2000 and 2012, the Portuguese economy grew less than the United States during the Great Depression and less than Japan during its lost decade. This paper asks why this happened, with a particular focus on the slump between 2000 and 2007. It describes the main facts of Portugal's recent economic history, evaluates some possible explanations for its dismal performance, and proposes a new hypothesis based on the misallocation of abundant capital flows from abroad. I put forward a model of credit frictions to show that if financial integration exceeds financial deepening, productivity will fall, generating a slump as relatively unproductive firms in the nontradables sector expand at the expense of more productive tradables firms. This explanation can also potentially account for the similarities and the differences between Portugal on the one hand, and Ireland and Spain on the other, during this period, and for some features of the crash in Portugal after 2010.
Keywords: Eurozone; Financial imperfections; Sudden stop
JEL Codes: E32; E65; F32; F43; N14; O52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misallocation of capital flows (F32) | decline in productivity (O49) |
| capital inflows (F21) | misallocation of capital flows (F32) |
| expansion of unproductive firms in nontradables sector (E69) | decline in productivity (O49) |
| financial integration without financial deepening (F30) | misallocation of capital flows (F32) |
| structural characteristics of Portugal's economy (E69) | decline in productivity (O49) |