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Home > Research > Working Paper No. 502: The effect of the financial crisis on TFP growth: a general equilibrium approach - Stephen Millard and Anamaria Nicolae
 

Working Paper No. 502: The effect of the financial crisis on TFP growth: a general equilibrium approach - Stephen Millard and Anamaria Nicolae

27 June 2014

​Working Paper No. 502
The effect of the financial crisis on TFP growth:  a general equilibrium approach
(495KB)
Stephen Millard and Anamaria Nicolae

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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