The Costs of Financial Crises: Resource Misallocation, Productivity, and Welfare in the 2001 Argentine Crisis

41 Pages Posted: 31 Dec 2013

See all articles by Guido Sandleris

Guido Sandleris

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Mark L. J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: January 2014

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. With the aim of resolving this puzzle, we present a framework that allows us to do the following. First, we account for changes in a country's measured productivity during a financial crisis 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. Second, we 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 dataset and we find that more than half of the, roughly, 10 percent decline in measured total factor productivity can be accounted for by deteriorations in the allocation of resources both across and within sectors. We measure the decline in welfare to be of the order of one‐quarter of one year's gross domestic product.

Keywords: Argentina, financial crisis, productivity, resource misallocation, welfare

JEL Classification: E01, E22, F41, O4

Suggested Citation

Sandleris, Guido and Wright, Mark L.J., The Costs of Financial Crises: Resource Misallocation, Productivity, and Welfare in the 2001 Argentine Crisis (January 2014). The Scandinavian Journal of Economics, Vol. 116, Issue 1, pp. 87-127, 2014. Available at SSRN: https://ssrn.com/abstract=2373319 or http://dx.doi.org/10.1111/sjoe.12050

Guido Sandleris (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

HOME PAGE: http://sais-jhu.edu/faculty/sandleris

Mark L.J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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