Financial Market Frictions, Productivity Growth and Crises in Emerging Economies

This paper documents that financial crises in emerging countries involve large and persistent losses in labor productivity. It then presents a model which features endogenous TFP growth through the adoption of new varieties of intermediates, and in which an agency problem in financial markets implies that technology adopters may be credit constrained. A crisis shock generates a decline in TFP of size and persistence comparable to the data. Financial frictions are quantitatively important, explaining half the medium run TFP decline. Both endogenous growth and the financial friction substantially contribute to a more persistent output decline and to an amplified short run response of consumption. These mechanisms also help in accounting for the time series properties of Argentina's GDP and Solow residual, especially at medium frequencies.