Financial Crises and Total Factor Productivity
41 Pages Posted: 5 Apr 2005
Date Written: March 22, 2005
Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Mexico and Asia. These falls are unusual in magnitude and present a difficult challenge for the standard small open economy neoclassical model. We show in the case of Mexico's 1994-95 crisis that the model predicts that inputs and output should have fallen much more than they did. Using models with endogenous factor utilization, we find that capital utilization and labor hoarding can account for a large fraction of the TFP fall during the crisis. However, these models also predict that output should fall significantly more than in the data. Given the behavior of TFP, the biggest challenge may not be explaining why output falls so much following financial crises, but rather why it falls so little.
Keywords: Financial crises, total factor productivity, output fluctuations
JEL Classification: E32, F41, J24
Suggested Citation: Suggested Citation