Staff Report 292

A Decade Lost and Found: Mexico and Chile in the 1980s

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
Timothy J. Kehoe | Consultant
Raimundo Soto
Raphael Bergoeing

Published September 1, 2001

Chile and Mexico experienced severe economic crises in the early 1980s. This paper analyzes four possible explanations for why Chile recovered much faster than did Mexico. Comparing data from the two countries allows us to rule out a monetarist explanation, an explanation based on falls in real wages and real exchange rates, and a debt overhang explanation. Using growth accounting, a calibrated growth model, and economic theory, we conclude that the crucial difference between the two countries was the earlier policy reforms in Chile that generated faster productivity growth. The most crucial of these reforms were in banking and bankruptcy procedures.

Published In: Review of Economic Dynamics (Vol. 5, No. 1, January 2002, pp. 166-205)

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