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

Author Info

  • Millard, Stephen

    ()

    (Bank of England)

  • Nicolae, Anamaria

    ()

    (Durham University Business School)

Abstract

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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Keywords: Endogenous growth; Research and development; Innovation;

Find related papers by JEL classification:

  • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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  1. Stelios Michalopoulos & Luc Laeven & Ross Levine, 2009. "Financial Innovation and Endogenous Growth," NBER Working Papers 15356, National Bureau of Economic Research, Inc.
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  7. Oulton, Nicholas & Sebastia-Barriel, Maria, 2013. "Long and short-term effects of the financial crisis on labour productivity, capital and output," Bank of England working papers 470, Bank of England.
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  12. 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.
  13. 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.
  14. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
  15. Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," Santa Cruz Center for International Economics, Working Paper Series qt0t6321ds, Center for International Economics, UC Santa Cruz.
  16. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
  17. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers 380, Bank of England.
  18. 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.
  19. Carol Corrado & Charles Hulten & Daniel Sichel, 2009. "Intangible Capital And U.S. Economic Growth," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(3), pages 661-685, 09.
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