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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Main Author:	Fattal Jaef, Roberto N.
Format:	Working Paper
Language:	English
Published:	World Bank, Washington, DC 2021
Subjects:	ALLOCATIVE EFFICIENCY UNEMPLOYMENT LABOR MARKET RIGIDITY FINANCIAL FRICTION ACCESS TO FINANCE PRIVATE FINANCE LABOR POLICY
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

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spelling	okr-10986-350042021-04-23T14:02:14Z Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina Fattal Jaef, Roberto N. ALLOCATIVE EFFICIENCY UNEMPLOYMENT LABOR MARKET RIGIDITY FINANCIAL FRICTION ACCESS TO FINANCE PRIVATE FINANCE LABOR POLICY 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. 2021-01-11T17:20:45Z 2021-01-11T17:20:45Z 2019-05-29 Working Paper http://documents.worldbank.org/curated/en/368701609942311353/Financial-Frictions-Allocative-Efficiency-and-Unemployment-A-Quantitative-Analysis-for-Argentina http://hdl.handle.net/10986/35004 English CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Working Paper Publications & Research,Publications & Research Latin America & Caribbean Argentina
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ALLOCATIVE EFFICIENCY UNEMPLOYMENT LABOR MARKET RIGIDITY FINANCIAL FRICTION ACCESS TO FINANCE PRIVATE FINANCE LABOR POLICY
spellingShingle	ALLOCATIVE EFFICIENCY UNEMPLOYMENT LABOR MARKET RIGIDITY FINANCIAL FRICTION ACCESS TO FINANCE PRIVATE FINANCE LABOR POLICY Fattal Jaef, Roberto N. Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina
geographic_facet	Latin America & Caribbean Argentina
description	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.
format	Working Paper
author	Fattal Jaef, Roberto N.
author_facet	Fattal Jaef, Roberto N.
author_sort	Fattal Jaef, Roberto N.
title	Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina
title_short	Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina
title_full	Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina
title_fullStr	Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina
title_full_unstemmed	Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina
title_sort	financial frictions, allocative efficiency, and unemployment : a quantitative analysis for argentina
publisher	World Bank, Washington, DC
publishDate	2021
url	http://documents.worldbank.org/curated/en/368701609942311353/Financial-Frictions-Allocative-Efficiency-and-Unemployment-A-Quantitative-Analysis-for-Argentina http://hdl.handle.net/10986/35004
_version_	1764482119349829632

Financial Frictions, Allocative Efficiency, and Unemployment : A Quantitative Analysis for Argentina

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