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Financial frictions and the economic the depression in Brazil

Brinca, Pedro and Costa-Filho, João (2022): Financial frictions and the economic the depression in Brazil.

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What is behind the economic depression Brazil experienced between 2014 and 2016? A synthetic control estimation corroborates the hypothesis of a mainly domestic episode. With that in mind, we apply the business cycle accounting method and find that the episode was driven by the efficiency wedge. We find econometric evidence that public development bank outlays have a positive (negative) impact in the short-run (long-run) on the efficiency wedge. This motivates a model with financial frictions and a public development bank that is able to reproduce the dynamics of output during the crisis.

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