TAILIEUCHUNG - Financial Frictions and Total Factor Productivity: Accounting for the Real Effects of Financial Crises

Seagram acquired substantially all of the outstanding PolyGram shares. On that date, Philips received NLG 11,531 million in cash and 47,831,952 Seagram shares representing approximately 12% of the outstanding Seagram shares. The sale of PolyGram resulted in a gain of NLG 10,675 million, or NLG per share, free of taxes. In order to gain insight into the Company’s cash flows, earnings capacity and financial position, the information about discontinued operations has been segregated from the information about continuing operations. The financial information relating to PolyGram, being a separate product sector, has been excluded from the respective captions in the consolidated financial statements and related notes, and is. | Financial Frictions and Total Factor Productivity Accounting for the Real Effects of Financial Crises1 Sangeeta Pratap Carlos Urrutia Hunter College Graduate Center CIE Dept. of Economics City University of New York ITAM June 2010 The financial crises or sudden stops of the last decade in emerging economies were accompanied by a large fall in total factor productivity. In this paper we explore the role of financial frictions in exacerbating the misallocation of resources and explaining this drop in TFP. We build a dynamic two-sector model of a small open economy with a cash in advance constraint where firms have to finance a part of their purchase of intermediate goods prior to production. The model is calibrated to the Mexican economy before the 1995 crisis and subject to an unexpected shock to interest rates. The financial friction can generate an endogenous fall in TFP of about percent and can explain 74 percent of the observed fall in GDP per worker. Adding a cost of adjusting labor between the two sectors and sectoral specificity of capital also generates the sectoral patterns of output and resource use observed in the data after the sudden stop. The results highlight the interaction between interest rates and allocative inefficiencies as an explanation of the real effects of the financial crisis. 1Email currutia@. We are grateful to Roberto Chang Tim Kehoe and Kim Ruhl for helpful comments. We also appreciate comments from participants at the Latin American Meetings of the Econometric Society Econometric Society Winter Meetings the meetings of the Society for Economic Dynamics the Midwest Macro Meetings and the Cornell-Penn State Macro Workshop. Seminar participants at Drexel University ITAM and Wesleyan University also provided helpful feedback. Vicente Castanon Lorenza Martinez Jose Luis Negrin and Jessica Serrano at the Banco de Mexico and Reyna Gutierrez at the Secretaria de Hacienda y Credito Publico

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