Banking Crisis and Borrower Productivity

Keiichiro Kobayashi and Noriyuki Yanagawa

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: In this paper, we propose a theoretical model in which a banking crisis (or bank distress) causes declines in aggregate productivity. When borrowing firms need additional bank loans to continue their businesses, a high probability of bank failure discourages ex ante investments (e.g., R&D investment) by firms that enhance their productivity. In a general equilibrium setting, we also show that there may be multiple equilibria: one in which bank distress continues and borrower productivity is low, and in the other, banks are healthy and borrower productivity is high. We show that the bank capital requirement may be effective in eliminating the bad equilibrium and may lead the economy to the good equilibrium in which the productivity of borrowing firms and the aggregate output are both high and the probability of bank failure is low.

Pages: 29 pages
Date: 2008-02
New Economics Papers: this item is included in nep-ban, nep-bec and nep-eff
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:08003

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