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Debt-Ridden Borrowers and Productivity Slowdown

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  • Keiichiro Kobayashi
  • Daichi Shirai

Abstract

Economic growth is known to slow down for an extended period after a financial crisis. We construct a model in which the one-time buildup of debt can depress the economy persistently even when there is no shock on financial technology. We consider the debt dynamics of firms under an endogenous borrowing constraint. The borrowing constraint binds tighter and production inefficiency is higher when the initial amount of debt is larger. Tightening aggregate borrowing constraints lowers aggregate productivity, leading to a persistent recession. This model therefore implies that debt reduction for overly indebted agents may restore economic growth.

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  • Keiichiro Kobayashi & Daichi Shirai, 2016. "Debt-Ridden Borrowers and Productivity Slowdown," CIGS Working Paper Series 16-001E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:16-001e
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    Cited by:

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