The Role of Establishment Heterogeneity in the Recovery from Sudden Stops

No 509, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: The 1997-1998 Asian crisis countries experienced drastic collapses of macroeconomic aggregates followed by highly persistent underperformance of economies relative to their pre-crises periods. In this paper, we develop a small open economy model with heterogeneous producers which can explain the evolution of the number of establishments across sizes following the sudden stop in Korea: the larger the size of establishments, the slower the recovery for the number of the establishments. The model shows that the establishment composition can explain 40 percent of the short-run drop in TFP, and almost all of the persistently underperforming Korean TFP from the second year of the sudden stop. With the transition dynamics of the TFP, the model can closely match the responses of the macroeconomic aggregates to the sudden stop in Korea. The model also predicts that this highly persistent behavior of TFP coming from the establishment composition causes output to be 7.7 percent lower than its trend even 20 years after the shock.

Date: 2013
New Economics Papers: this item is included in nep-dge, nep-opm and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:509

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