Productivity and Trade Dynamics in Sudden Stops

Abstract

This paper proposes a framework to jointly study productivity and trade dynamics during financial crises. The persistent output loss caused by crises is driven by lower productivity growth, which is determined by changes in product entry and exit margins in domestic and export markets. We calibrate and validate the model using unique data on firms' product portfolios, finding it closely matches the behavior of various margins during Chile's 1998 sudden stop. We decompose the sources of the welfare cost of sudden stops, finding a third of the welfare cost is due to a decline in productivity growth. Lower productivity growth, in turn, is due mostly to slower firm and product entry into the domestic market, while a decrease in production costs induces surviving firms to tilt their product portfolios towards export markets, boosting the productivity recovery in the aftermath of the crisis.