Working Paper: NBER ID: w17552
Authors: Guido Sandleris; Mark L.J. Wright
Abstract: Financial crises in emerging market countries appear to be very costly: both output and a host of partial welfare indicators decline dramatically. The magnitude of these costs is puzzling both from an accounting perspective -- factor usage does not decline as much as output, resulting in large falls in measured productivity -- and from a theoretical perspective. Towards a resolution of this puzzle, we present a framework that allows us to (i) account for changes in a country's measured productivity during a financial crises as the result of changes in the underlying technology of the economy, the efficiency with which resources are allocated across sectors, and the efficiency of the resource allocation within sectors driven both by reallocation amongst existing plants and by entry and exit; and (ii) measure the change in the country's welfare resulting from changes in productivity, government spending, the terms of trade, and a country's international investment position. We apply this framework to the Argentine crisis of 2001 using a unique establishment level data-set and find that more than half of the roughly 10% decline in measured total factor productivity can be accounted for by deterioration in the allocation of resources both across and within sectors. We measure the decline in welfare to be on the order of one-quarter of one years GDP.
Keywords: Financial Crises; Resource Misallocation; Productivity; Welfare; Argentina
JEL Codes: E01; F32; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| misallocation (D61) | reduced productivity (O49) |
| reduced productivity (O49) | decline in welfare (I38) |
| changes in resource allocation across sectors (O14) | productivity (O49) |
| changes in resource allocation within sectors (O14) | productivity (O49) |
| changes in underlying technology (O33) | productivity (O49) |