Debt-Ridden Borrowers and Productivity Slowdown
Keiichiro Kobayashi and
No 16-001E, CIGS Working Paper Series from The Canon Institute for Global Studies
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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Working Paper: Debt-Ridden Borrowers and Productivity Slowdown (2012)
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