The Costs of Emerging Markets
Financial Crises: Output,
Productivity and Welfare
LFN, Buenos Aires
September 30, 2009
The paper
• Basic question: Why are financial crises so
costly in terms of output and welfare?
– Or, why does TFP collapse during financial
crisis?
• Note that the welfare question is tricky and the W
function that we use in economics may not be the
appropriate one
– For instance people care a lot about unemployment
(Pernice and Sturzenegger, 2003)
– I say this because the paper talks about murders and
suicides
The paper
• It builds a model based on the hypothesis that
financial crises decrease the efficiency of
resource allocation and shows how this
decrease in efficiency affects TFP
• It also includes:
– A careful discussion of the difference between the
ideal measure of real value added and the approach
used by national statistical agencies
– An empirical application to the Argentinean crisis of
2001/2002
• Maybe the Argentinean government could start charging
royalties on papers on the Argentinean crisis
The paper
• Basic question: Why are financial crises so
costly in terms of output and welfare?
– One hypothesis is that resources are
allocated less efficiently (or more inefficiently)
during crises
– The paper presents a framework for
measuring this effect
– Guido and Mark are very careful in building a
model that can then be taken to the data.
– This is a great contribution of the paper
This is the equation we use to
implement our TFP decomposition
The paper
• Main findings:
– In the Argentinean crisis 60% of the decline in
TFP is driven by changes in the efficiency of
resource allocation (especially allocation
across sectors)
– But 17 percent (??) is measurement error
Crisis
• We model the crisis as an unanticipated
change in the prices at which goods trade
internationally, the world interest rate, and
the entire distribution of wedges faced by
firms
• Intuition:
– Real depreciation
–?
–?
Crisis
• Questions:
– Is the international interest rate that changes
(presumably goes up), or some measure of
the risk premium?
– What about the wedges?
What are the wedges?
• The paper provides an intuition in term of
distortionary taxes
– But why are they different across sectors (and
possibly even across plants)?
– Why does the financial crisis affect them in a
different way?
• For me it is very hard to follow the paper
without understanding more about the
wedges
Fixed costs
• Flow fixed costs and initial fixed costs
– Are they the same?
• I don’t think they should be
– How important are they for the results of the model?
• Does it make sense to assume that the decision
to produce in any given period is static?
– Is this related to the assumption on flow fixed costs
and start-up fixed costs?
– Doesn’t this modeling strategy generate too many
shutdowns?
Empirical application
• How do you take care of entry and exit in
your sample?
• It is very strange that the wedge on capital
is the one that changes the least
– One would think that a financial crisis should
have a big effect on investment
A view from the planet Krugman
• The ongoing financial crisis has made it clear that macroeconomic
models need to allocate a more prominent role to financial shocks
and financial frictions. One possible way to achieve this is by
adopting a behavioural approach that incorporates elements of
“animal spirits”, as outlined, for instance, in the recent book by
Akerlof and Shiller (2009). In our own work, we have focused on a
different avenue through which financial shocks could affect the
macroeconomy – the interaction between nonstandard economic
shocks and enforcement problems of financial contracts
•
Jermann and Quadrini
• Guido and Mark are closer to J&Q than to A&S
• So, I asked my father
The Costs of Emerging Markets
Financial Crises: Output,
Productivity and Welfare
LFN, Buenos Aires
September 30, 2009