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Productivity in economies with financial frictions: facts and a theory

Productivity in economies with financial frictions: facts and a theory
Productivity in economies with financial frictions: facts and a theory
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.
small open economy, financial intermediation, total factor productivity
613
Economics Division, University of Southampton
Meza, Felipe
522232b3-5027-4809-bb37-e51bfb3a5d82
Benjamin, David
6b774131-63cb-414e-8ccd-1960bffe1611
Meza, Felipe
522232b3-5027-4809-bb37-e51bfb3a5d82
Benjamin, David
6b774131-63cb-414e-8ccd-1960bffe1611

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

Record type: Monograph (Project Report)

Abstract

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.

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Published date: 2006
Keywords: small open economy, financial intermediation, total factor productivity

Identifiers

Local EPrints ID: 42765
URI: http://eprints.soton.ac.uk/id/eprint/42765
PURE UUID: 41f55c5f-6adc-40c8-8478-810070ba0c2f

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Date deposited: 12 Jan 2007
Last modified: 15 Mar 2024 08:50

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Contributors

Author: Felipe Meza
Author: David Benjamin

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