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

Author

Listed:
  • Stephen Millard

    (Bank of England)

  • Anamaria Nicolae

    (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

  • Stephen Millard & Anamaria Nicolae, 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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    2. Anderton, Robert & Elding, Catherine & Haroutunian, Stephan & Jarvis, Valerie & Aranki, Ted & Rusinova, Desislava & Labhard, Vincent & Jacquinot, Pascal & Dieppe, Alistair & Szörfi, Béla, 2014. "Potential output from a euro area perspective," Occasional Paper Series 156, European Central Bank.
    3. 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.
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    5. Osuagwu, Eze Simpson & Isola, Wakeel & Nwaogwugwu, Isaac, 2018. "Measuring Technical Efficiency and Productivity Change in the Nigerian Banking Sector: A Comparison of non-parametric DEA and parametric SFA," MPRA Paper 112948, University Library of Munich, Germany.
    6. Kapetanios, George & Price, Simon & Young, Garry, 2018. "A UK financial conditions index using targeted data reduction: Forecasting and structural identification," Econometrics and Statistics, Elsevier, vol. 7(C), pages 1-17.

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    JEL classification:

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

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