Productivity and trade dynamics in sudden stops

This paper proposes a framework to jointly study productivity and trade dynamics during financial crises. The persistent output loss caused by crises is driven by lower productivity growth, which is determined by changes in product entry and exit margins in domestic and export markets. We calibrate and validate the model using unique data on firms’ product portfolios, finding they closely match the behavior of various margins during Chile's 1998 sudden stop. We decompose the sources of the welfare cost of sudden stops, finding that 30% is due to a decline in productivity growth. Lower productivity growth, in turn, is due mostly to slower firm and product entry into the domestic market, while a persistent real exchange rate depreciation induces surviving firms to tilt their product portfolios toward export markets, driving the productivity recovery in the aftermath of the crisis.