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

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Listed author(s):
  • 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
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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  13. Laeven, Luc & Levine, Ross & Michalopoulos, Stelios, 2015. "Financial innovation and endogenous growth," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 1-24.
  14. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers 380, Bank of England.
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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. 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.

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