Non-performing loans, prospective bailouts, and Japan's slowdown

Levon Barseghyan

Journal of Monetary Economics, 2010, vol. 57, issue 7, 873-890

Abstract: The delay in the government bailout of the financial sector played a key role in Japan's slowdown during the 1990s and early 2000s. This argument is articulated in a general equilibrium model in which the government provides deposit insurance to the financial sector. The existence of non-performing loans, combined with a delay in the bailout, leads to a persistent decline in economic activity. Consistent with Japan's experience, the decline in output is caused not only by a fall in investment, but also by a decline in labor and total factor productivity.

Date: 2010
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