Banking Crisis and Borrower Productivity
AbstractIn this paper, we propose a theoretical model in which a banking crisis (or bank distress) causes declines in aggregate productivity. When borrowing firms need additional bank loans to continue their businesses, a high probability of bank failure discourages ex ante investments (e.g., R&D investment) by firms that enhance their productivity. In a general equilibrium setting, we also show that there may be multiple equilibria: one in which bank distress continues and borrower productivity is low, and in the other, banks are healthy and borrower productivity is high. We show that the bank capital requirement may be effective in eliminating the bad equilibrium and may lead the economy to the good equilibrium in which the productivity of borrowing firms and the aggregate output are both high and the probability of bank failure is low.
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Bibliographic InfoPaper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 08003.
Length: 29 pages
Date of creation: Feb 2008
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-16 (All new papers)
- NEP-BAN-2008-02-16 (Banking)
- NEP-BEC-2008-02-16 (Business Economics)
- NEP-EFF-2008-02-16 (Efficiency & Productivity)
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