US monetary policy has a significant impact on the global economy, with recent literature emphasizing the dollar’s role as the dominant currency. This paper examines how US monetary policy affects productivity in non-US economies through allocative efficiency. We develop a two-country model featuring dollar dominance in trade and misallocations from markup heterogeneity. When US monetary policy tightens, dollar appreciation affects non-US economies through two channels. First, it lowers the marginal costs in dollars of non-US exporters, causing large export firms with high markups that underproduce relative to the efficient allocation to incompletely pass through these changes, thereby increasing their markups further. Second, in domestic markets, dollar appreciation raises import prices, easing competitive pressures for local producers. Both effects reallocate resources from large, high-markup firms to small, low-markup firms, worsening allocative efficiency. Using plant-level data from Chile and Colombia, where trade is predominantly invoiced in dollars, we provide evidence of factor reallocation from high-markup to low-markup firms following US monetary tightening.
We present an aggregation result that structurally dissects the drivers of aggregate productivity, i.e., technology and the reallocation of resources, across arbitrary parts of the economy using sufficient statistics that can be measured with standard datasets. Besides the typical statistics of factor shares and distortion changes, consumption share changes emerge as a new sufficient statistics that capture an income redistribution channel between households. This channel reflects how changes in households’ income propagate upstream, influencing the allocation of resources across firms. We apply our results to revisit Chile’s aggregate productivity stagnation since 2010, leveraging two decades of administrative firm-to-firm data. This stagnation is almost entirely driven by the reallocation of resources and in particular by expenditure changes of specific groups of the economy. Exports of mining, domestic output of manufacturing and retail, and incumbent large firms shape the bulk of this reallocation.
This paper investigates how production networks shape firms’ R&D decisions and the resulting aggregate inefficiencies. We develop a dynamic model in which firms form supplier relationships through an exogenous yet persistent matching process and rely on those links to introduce new products. The model features two sources of misallocation. Market-power distortions and a network-formation externality whereby firms fail to internalize that their R&D makes them more attractive trading partners, improving match quality for all firms in the economy. We estimate the model using Japanese firm-to-firmtransaction and patent data and show that the first-best allocation lies close to the decentralized outcome. Market-power corrections raise R&D incentives for older firms by relieving double marginalization along long supply chains. Internalizing the network-formation externality instead tilts R&D toward younger firms that expand their supplier base most rapidly. These opposing forces offset each other, leaving the planner’s allocation near the observed one.