A study on the relationship between inflation and total factor productivity (TFP) in Argentina and Mexico.
Written in 2007; 3,164 words; 13 sources; MLA; $ 91.95
Paper Summary:
The paper discusses how when Argentina goes through a financial crisis the total factor productivity (TFP) drops. However when Mexico goes through a financial crisis, the TFP drops but not as drastically. The paper researches the major theories that help to explain why the TFP in Argentina drops, while it does not in Mexico when a similar set of circumstances is applied. The paper reviews available literature and looks at the capital utilization model and the neoclassical growth theory. The paper concludes that the research supports the thesis that TFP and inflation do not have a causal relationship, but that they do follow similar trends in relation to fiscal policies.
Outline:
Literature Review and Analysis
The Capital Utilization Model
Neoclassical Growth Theory
Probable Causes of Failure
Solutions to Reducing Inflation
Is Dollarization Really the Answer
From the Paper:
"The Tequila Crisis in Mexico was one example where this exact effect was observed to have happened. As inflation rates rose, the opportunity cost of capital rose quickly as well. At the same time TFP drops below the trend (Quintin). Therefore Quentin and Edwin concluded that the TFP drop was due to a drop in capital utilization. When these authors applied this concept to models with homogeneous capital, using electricity as the key indicator or capital utilization, it accounted for almost 1/3 of Mexico's drop in TFP. When applying the measure with heterogeneous capital it tends to predict energy consumption more accurately (Quintin). This study concluded that unproductive capital remained unused. This left more resources to be devoted to more productive physical capital, according to Quintin."
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