Felipe Meza

Factor Utilization and the Real Impact of Financial Crises

Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Latin America and Asia. We study the ability of various versions of the small open economy neoclassical growth model to account for the behavior of inputs, output, and aggregate productivity during Mexicos 1994-95 crisis. We find that that capital utilization and labor hoarding can account for a large fraction of the fall in measured productivity. While capital utilization alone does little to improve the performance of the model during the crisis, introducing labor hoarding significantly reduces the gap between the evidence and the predicted fall in output and hours.

Financial Crises and Total Factor Productivity

Total factor productivity (TFP) falls markedly during financial crises, as we document with recent evidence from Mexico and Asia. These falls are unusual in magnitude and present a difficult challenge for the standard small open economy neoclassical model. We show in the case of Mexico’s 1994-95 crisis that the model predicts that inputs and output should have fallen much more than they did. Using models with endogenous factor utilization, we find that capital utilization and labor hoarding can account for a large fraction of the TFP fall during the crisis. However, these models also predict that output should fall significantly more than in the data. Given the behavior of TFP, the biggest challenge may not be explaining why output falls so much following financial crises, but rather why it falls so little.

Total Factor Productivity and Labor Reallocation: The Case of the Korean 1997 Crisis

In recent research on financial crises, large exogenous shocks to total factor productivity (TFP) are used as the driving force accounting for large output falls. TFP fell 3% after the Korean 1997 financial crisis. We find evidence that the large fall in TFP is mostly due to a sectoral reallocation of labor from the more productive manufacturing and construction sectors to the less productive wholesale trade sector, the public sector and agriculture. We construct a two-sector model that accounts for the labor reallocation. The model has a consumption sector and an investment sector. Firms face sector-specific working capital constraints, which we calibrate with data from financial statements. The rise in interest rates makes inputs more costly. The model accounts for 42% of the TFP fall. The model also accounts for 53% of the fall in GDP. It is broadly consistent with the post-crisis behavior of the Korean economy.

Financial Crisis, Fiscal Policy, and the 1995 GDP Contraction in Mexico

In 1995 Mexico experienced its largest contraction of gross domestic product (GDP) since the early twentieth century. I propose a simple mechanism to partially account for the contraction: the effects of changes in fiscal policy. The contraction of GDP was preceded by a financial crisis. The government responded by raising taxes and reducing spending. Using a model with taxation and government consumption, and the business cycle accounting methodology, I measure the impact of fiscal policy. Fiscal policy accounts for 20.7% of the fall in output. Copyright (c) 2008 The Ohio State University.

Labor, Output and Consumption in Business Cycle Models of Emerging Economies

Motivated by the fact that, over the business cycle, labor dynamics in emergingeconomies differ in nontrivial ways from those observed in developed economies, we assess the relative importance of trend shocks in emerging economies in the business cycle model of Aguiar and Gopinath (2007) when labor data is explicitly taken into account. We study Mexico and Canada as representatives of emerging and developed economies, respectively. We find for Mexico that, in the benchmark case with Cobb-Douglas preferences, the income effect on consumption of trend shocks is too strong, delivering countercyclical and counterfactual fluctuations in employment. The model faces a trade-off between, on the one hand, having sizeable growth shocks, thereby having a good match in terms of relatively high consumption volatility, and, on the other, having procyclical employment dynamics. This is remedied when both quasilinear preferences are assumed and the identification strategy explicitly takes into consideration labor dynamics. In this case trend shocks continue to be relatively stronger in emerging economies.Additionally, we find that differences in labor dynamics across emerging and developing economies are associated with the relatively large informal labor sector in emerging economies. It is in this dimension, when trying to match the dynamics of formal employment, that we find less evidence supporting an important role of trend shocks as being the main driving force of business cycles in emerging economies.