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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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