Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina
Argentina is characterized by low levels of private credit and persistent labor market rigidities. Furthermore, financial development remained stagnant in Argentina even during episodes of fast economic growth, in stark contrast with the experience...
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| Language: | English |
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World Bank, Washington, DC
2021
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| Online Access: | http://documents.worldbank.org/curated/en/368701609942311353/Financial-Frictions-Allocative-Efficiency-and-Unemployment-A-Quantitative-Analysis-for-Argentina http://hdl.handle.net/10986/35004 |
| Summary: | Argentina is characterized by low levels
of private credit and persistent labor market rigidities.
Furthermore, financial development remained stagnant in
Argentina even during episodes of fast economic growth, in
stark contrast with the experience of sustained growth
accelerations around the world. The goals of the paper are
twofold. Firstly, it is concerned with quantifying the
productivity losses associated with such low levels of
private credit penetration and characterizing its
implications for different subsets of firms in the economy.
The latter is important in light of various policy
interventions aimed at mitigating the impact of low access
to credit based on firm-size thresholds. Secondly, it
studies the dynamics of hypothetical reforms to credit
markets in a context of rigid labor markets, which seems to
be the adequate scenario in which structural reforms will
have to be implemented, given the stickiness that labor
market regulations have shown to reform efforts in the past.
It finds sizable productivity losses from financial
frictions, in the order of thirteen percent. At the micro
level it finds that it is the youngest firms, whose average
marginal return to capital is far above the riskfree rate in
the economy, that are more prone to become financially
constrained. Turning to reform scenarios, we investigate
sudden reforms that are implemented abruptly and more
plausible reform paths that gradually dismantle financial
frictions. In the former, productivity and the investment
rate rise sharply on impact, while it also does the rate of
unemployment, going from five to almost twelve percent. In
the latter, the rise of unemployment is more gradual and
less sharp, peaking at seven percent. On the flipside, the
investment rate declines on impact, although the contraction
is short-lived. |
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