Productivity in economies with financial frictions: facts and a theory

Meza, Felipe and Benjamin, David (2006) Productivity in economies with financial frictions: facts and a theory , Southampton, UK University of Southampton, Economics Division, School of Social Sciences (Discussion Papers in Economics and Econometrics, 613).


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We document and account for two facts regarding the relation between international interest rates and total factor productivity (TFP) in a sample of developing countries. First, there is a negative correlation between both variables at quarterly frequency. Second, the share of agricultural labor and interest rates are positively correlated, whereas the share of agricultural labor and TFP are negatively correlated. Manufacturing labor shows opposite correlations. These relationships are particularly strong in the aftermath of financial crises. We then construct a model in which the presence of costly intermediation can produce such relationships. We show that, after increases in interest rates, a requirement to intermediate factors of production in high productivity sectors, like manufacturing, causes resources to leave these sectors. Resources end up in low productivity sectors, like agriculture, where intermediation is cheaper. This lowers aggregate productivity. We show that the channel we identify is quantitatively important in the case of Korea after the 1997 financial crisis.

Item Type: Monograph (Project Report)
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Keywords: small open economy, financial intermediation, total factor productivity

ePrint ID: 42765
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Date Deposited: 12 Jan 2007
Last Modified: 16 Apr 2017 18:51
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