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Capital Allocation and Productivity in South Europe

Gita Gopinath, Sebnem Kalemli-Ozcan, Loukas Karabarbounis and Carolina Villegas-Sanchez ()

No 728, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.

Keywords: Misallocation; Productivity; Dispersion; Capital flows; Europe (search for similar items in EconPapers)
JEL-codes: D24 E22 F41 O16 O47 (search for similar items in EconPapers)
Pages: 95 pages
Date: 2015-07-31
New Economics Papers: this item is included in nep-dge, nep-eec, nep-eff, nep-ger, nep-ifn, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (87)

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Related works:
Journal Article: Capital Allocation and Productivity in South Europe (2017) Downloads
Working Paper: Capital Allocation and Productivity in South Europe (2015) Downloads
Working Paper: Capital Allocation and Productivity in South Europe (2015) Downloads
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