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