Working Paper: NBER ID: w16400
Authors: Francisco J. Buera; Yongseok Shin
Abstract: We quantify the role of financial frictions and the initial misallocation of resources in explaining development dynamics. Following a reform that triggers efficient reallocation of resources, our model economy with financial frictions converges slowly to the new steady state--it takes twice as long to cover half the distance to the steady state as the neoclassical growth model. Investment rates and total factor productivity start out low and rise over time. These model dynamics are endogenously determined by the extent of initial resource misallocation and the degree of financial frictions. We present data from post-war miracle economies on the evolution of macro aggregates, factor reallocation, and establishment size distribution, which support the aggregate and micro-level implications of our theory.
Keywords: financial frictions; resource allocation; economic development; growth dynamics; miracle economies
JEL Codes: E21; E22; E44; O11; O16; O25; O4; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial frictions (G19) | Slowing down reallocation of resources (D25) |
| Removal of idiosyncratic distortions (C51) | Improved resource allocation (D61) |
| Improved resource allocation (D61) | Increased GDP growth (O49) |
| Improved resource allocation (D61) | Increased TFP (O49) |
| Financial frictions (G19) | Affects transitional dynamics of economic growth (F62) |
| Removal of idiosyncratic distortions (C51) | Gradual reallocation of resources (D25) |
| Gradual reallocation of resources (D25) | Persistent growth in TFP (O49) |
| Gradual reallocation of resources (D25) | Increased investment rates (G31) |