Efficient Reallocation and Productivity during Commodity Price Cycles

This paper investigates how low-frequency commodity price fluctuations trigger a reallocation process that endogenously generates a decline in manufacturing productivity. I build a model in which firms with heterogeneous productivity decide between two technologies with different capital intensities and choose whether to become exporters. During a commodity boom, exporters lose market share due to exchange rate appreciation. Moreover, a commodity boom increases the relative cost of capital, which is used intensively in resource production, leading to additional reallocation within manufacturing from more capital intensive to less capital-intensive manufacturing firms. I calibrate the model to the Chilean economy and show that it can match the relevant micro and macro moments. When fed with a realistic commodity price cycle, the baseline model generates about half of the productivity decline observed in the data, a figure that is two times larger than in a counterfactual economy with no technology decision. ∗I am deeply indebted to Felipe Saffie, Borağan Aruoba, and Şebnem Kalemli-Özcan for guidance and support. For very useful comments and suggestions, I thank John Haltiwanger, Nuno Limão, John Shea, and seminar participants at the University of Maryland. This paper was partly written at the Central Bank of Chile, while I was a summer intern in 2017. I am especially grateful for their hospitality. †PhD Candidate, University of Maryland, Department of Economics. Email: heresi@econ.umd.edu.