Working Paper: NBER ID: w21453
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 is consistent with important aspects of firms' behavior 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 Allocation; Productivity; Financial Frictions; Southern Europe; Manufacturing
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 rates (E43) | Increased dispersion in the return to capital (D29) |
| Increased dispersion in the return to capital (D29) | Lower total factor productivity (TFP) (D24) |
| Decline in real interest rates (E43) | Lower total factor productivity (TFP) (D24) |
| Capital inflows favor firms with higher net worth (F21) | Misallocation towards less productive firms (D22) |
| Firms with higher net worth increase their capital in response to lower interest rates (E43) | Constrained firms delay their capital adjustments (D25) |
| Size-dependent borrowing constraints (G51) | Significant increases in capital borrowing and MRPK dispersion (D29) |