Electricity and Firm Productivity: A General-Equilibrium Approach

By Stephie Fried and David Lagakos

http://d.repec.org/n?u=RePEc:ces:ceswps:_9490&r=dge

Many policymakers view power outages as a major constraint on firm productivity in developing countries. Yet empirical studies find modest short-run effects of outages on firm performance. This paper builds a dynamic macroeconomic model to study the long-run general-equilibrium effects of power outages on productivity. Outages lower productivity in the model by creating idle resources, depressing the scale of incumbent firms and reducing entry of new firms. Consistent with the empirical literature, the model predicts small short-run effects of eliminating outages. However, the long-run general-equilibrium effects are much larger, supporting the view that eliminating outages is an important development objective.

The title of this paper does not do justice to the importance of power outages. The paper shows that Nigeria could increase labor productivity by 22% by eliminating power outages, in equal parts from reducing idle labor, expansion of existing firms, and firm entry. This is big.

Monetary Policy and Endogenous Financial Crises

By Fabrice Collard, Frédéric Boissay, Jordi Galì and Cristina Manea

http://d.repec.org/n?u=RePEc:tse:wpaper:126275&r=dge

We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.

That central banks should deviate for their inflation mandate is not objective, after all for most them a law or some sort of contract with the government restricts them to just that. Yet it is generally understood that they also should care about output and/or employment. And as history has shown, financial crises do have an impact on output and employment. Thus it seems natural that central banks should keep an eye for financial trouble. The paper argues that this best done by preventing over-investing and then reacting to that late and abruptly. This year is going to be interesting.