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.
In the presence of distortions, the reallocation of resources towards more valuable parts of the economy, namely allocative efficiency, is fundamental for understanding aggregate outcomes such as aggregate productivity. Nevertheless, allocative efficiency continues to be a black box. We present a theory that allows to structurally dissect allocative efficiency into an arbitrary partition of the economy. For each of these parts, allocative efficiency evolves according to sufficient statistics of factor shares and distortions in any input of the economy. These sufficient statistics are then aggregated according to a new decomposition of Domar weights. We apply our results to revisit growth accounting and use administrative firm-to-firm and tax data for the universe of formal firms to measure the microeconomic drivers of aggregate productivity stagnation in Chile during the 2010 decade. Aggregate productivity stagnation is almost entirely driven by allocative efficiency. Export activity of mining and domestic activity of retail shape the bulk of this stagnation as factors reallocated to less distorted parts of the economy.
This paper investigates the interaction between production networks and firms’ research and development (R&D) decisions and their implications for aggregate inefficiency. Using Japanese inter-firm transaction and patent data, we document that older firms have more network connections and tend to connect with other older firms. Additionally, connected firms’ R&D stimulates innovation in their partner firms. Motivated by these empirical findings, we construct a model that incorporates the dynamics of production networks and R&D as a new variety creation. In this model, firms gradually build their supply chains and can leverage their existing supply chains to develop and sell new products. Our model implies that older firms at the center of the production network underinvest in R&D relative to the optimal allocation.