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The effect of the financial crisis on TFP growth: a general equilibrium approach

  • Millard, Stephen


    (Bank of England)

  • Nicolae, Anamaria


    (Durham University Business School)

In this paper, we use a simple endogenous growth model to show how a financial crisis might have a permanent effect on the level of total factor productivity (TFP). In the model, a financial shock leads to a rise in the spread between the rate of interest paid by firms and the risk-free rate. Since firms have to borrow to finance their research and development (R&D) spending, such a rise in the spread leads to a fall in R&D spending, which affects innovation and, hence, reduces TFP growth. In turn, this leads to permanent falls in the levels of output and labour productivity.

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Paper provided by Bank of England in its series Bank of England working papers with number 502.

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Length: 27 pages
Date of creation: 27 Jun 2014
Date of revision:
Handle: RePEc:boe:boeewp:0502
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  1. Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 305-335, September.
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  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  7. Nir Jaimovich, 2004. "Firm Dynamics, Markup Variations, and the Business Cycle," Discussion Papers 07-013, Stanford Institute for Economic Policy Research, revised Mar 2007.
  8. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2006. "Zombie Lending and Depressed Restructuring in Japan," NBER Working Papers 12129, National Bureau of Economic Research, Inc.
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  13. Nishimura, Kiyohiko G. & Nakajima, Takanobu & Kiyota, Kozo, 2005. "Does the natural selection mechanism still work in severe recessions?: Examination of the Japanese economy in the 1990s," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 53-78, September.
  14. Fernandez-Corugedo, Emilio & McMahon, Michael & Millard, Stephen & Rachel, Lukasz, 2011. "Understanding the macroeconomic effects of working capital in the United Kingdom," The Warwick Economics Research Paper Series (TWERPS) 959, University of Warwick, Department of Economics.
  15. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  16. Alina Barnett & Ben Broadbent & Adrian Chiu & Jeremy Franklin & Helen Miller, 2014. "Impaired Capital Reallocation and Productivity," National Institute Economic Review, National Institute of Economic and Social Research, vol. 228(1), pages R35-R48, May.
  17. Barnett, Alina & Chiu, Adrian & Franklin, Jeremy & Sebastia-Barriel, Maria, 2014. "The productivity puzzle: a firm-level investigation into employment behaviour and resource allocation over the crisis," Bank of England working papers 495, Bank of England.
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