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Credit, Misallocation and Productivity: A Disaggregated Analysis

Author

Listed:
  • Felipe Meza

    (ITAM)

  • Sangeeta Pratap

    (Hunter College, CUNY)

  • Carlos Urrutia

    (ITAM)

Abstract

We study the effect of credit conditions on the allocation of inputs, and their implications for aggregate TFP growth. For this, we build a new dataset for Mexican manufacturing merging real and financial data at the 4-digit industrial sector level. Using a simple misallocation framework, we find that changes in inter-industry allocative efficiency account for 41 percent of changes in aggregate TFP. We then construct a model of firm behavior with working capital constraints and borrowing limits which generate sub-optimal use of inputs, and calibrate it to our data. We find that the model accounts for 38 percent of the observed variability in efficiency. An important conclusion is that heterogeneity in credit conditions across industries is key in accounting for efficiency gains. Despite overall credit stagnation, more access to credit and lower interest rates to distorted industries contributed substantially to the recovery from the 2009 recession, suggesting a plausible mechanism for credit-less recoveries. (Copyright: Elsevier)

Suggested Citation

  • Felipe Meza & Sangeeta Pratap & Carlos Urrutia, 2019. "Credit, Misallocation and Productivity: A Disaggregated Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 61-86, October.
    • Handle: RePEc:red:issued:18-264
    DOI: 10.1016/j.red.2019.03.004
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    Cited by:

    1. Monacelli, Tommaso & Sala, Luca & Siena, Daniele, 2023. "Real interest rates and productivity in small open economies," Journal of International Economics, Elsevier, vol. 142(C).
    2. Meza, Felipe & Pratap, Sangeeta & Urrutia, Carlos, 2020. "Credit and investment distortions: Evidence from Mexican manufacturing," Economics Letters, Elsevier, vol. 197(C).
    3. Sámano Daniel, 2022. "Foreign Currency Working Capital Constraints for Imported Inputs and Compositional Effects in Intermediate Goods," Working Papers 2022-20, Banco de México.
    4. Alberola, Enrique & Urrutia, Carlos, 2020. "Does informality facilitate inflation stability?," Journal of Development Economics, Elsevier, vol. 146(C).
    5. Miguel Acosta-Henao & Sangeeta Pratap & Manuel Taboada, 2023. "Relationship Lending: Characteristics and Real Effects," Working Papers Central Bank of Chile 999, Central Bank of Chile.
    6. Chibane, Messaoud & Gabriel, Amadeus & Giménez Roche, Gabriel A., 2022. "Credit booms and crisis-emergent asset comovement: The problem of latent correlation," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 270-279.

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    More about this item

    Keywords

    Misallocation; Total factor productivity; Financial frictions; Interest rates;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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