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Title: Capital Allocation and Productivity in South Europe

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

Publication Date: September 2015

Keyword(s): Capital Flows, Dispersion, Europe, Misallocation and Productivity

Programme Area(s): International Macroeconomics and Finance and Macroeconomics and Growth

Abstract: Starting in the early 1990s, countries in southern Europe experienced low productivity growth alongside declining real interest rates. We use data for manufacturing firms in Spain between 1999 and 2012 to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor, and a significant increase in productivity losses from capital misallocation over time. We develop a model with size-dependent financial frictions that generates firm-level behavior similar to the behavior 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 significant 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 show that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway.

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Bibliographic Reference

Gopinath, G, Kalemli-Ozcan, S, Karabarbounis, L and Villegas-Sanchez, C. 2015. 'Capital Allocation and Productivity in South Europe'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10826