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Debt-Ridden Borrowers and Productivity Slowdown

Listed author(s):
  • Keiichiro Kobayashi
  • Daichi Shirai

Economic growth is known to slow down for an extended period after a financial crisis. We construct a model in which the one-time buildup of debt can depress the economy persistently even when there is no shock on financial technology. We consider the debt dynamics of firms under an endogenous borrowing constraint. The borrowing constraint binds tighter and production inefficiency is higher when the initial amount of debt is larger. Tightening aggregate borrowing constraints lowers aggregate productivity, leading to a persistent recession. This model therefore implies that debt reduction for overly indebted agents may restore economic growth.

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File URL: http://www.canon-igs.org/research_papers/160208_kobayashi_shirai.pdf
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Paper provided by The Canon Institute for Global Studies in its series CIGS Working Paper Series with number 16-001E.

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Length: 43
Date of creation: Feb 2016
Handle: RePEc:cnn:wpaper:16-001e
Contact details of provider: Web page: http://www.canon-igs.org/en/

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