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

Author

Listed:
  • 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.

Suggested Citation

  • Millard, Stephen & Nicolae, Anamaria, 2014. "The effect of the financial crisis on TFP growth: a general equilibrium approach," Bank of England working papers 502, Bank of England.
    • Handle: RePEc:boe:boeewp:0502
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    References listed on IDEAS

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    Cited by:

    1. Isoré, Marlène & Szczerbowicz, Urszula, 2017. "Disaster risk and preference shifts in a New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 97-125.
    2. repec:eee:finsta:v:30:y:2017:i:c:p:67-78 is not listed on IDEAS
    3. Kapetanios, G & Price, SG & Young, G, 2017. "A UK financial conditions index using targeted data reduction: forecasting and structural identification," Essex Finance Centre Working Papers 20328, University of Essex, Essex Business School.

    More about this item

    Keywords

    Endogenous growth; Research and development; Innovation;

    JEL classification:

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

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