Skip to content

Research at St Andrews

Capital deaccumulation and the large persistent effects of financial crises

Research output: Working paper

Author(s)

School/Research organisations

Abstract

In a panel of OECD and emerging economies, I find that banking crises are characterized by larger initial drops in investment than other large recessions and are followed by particularly persistent drops in output. Furthermore, the larger the drop in investment during the crisis, the more persistent the decrease in output subsequently. I present a model to account for these patterns, in which a financial shock temporarily increases the costs of external finance for investing entrepreneurs, leading to a drop in investment and a persistent slump in output and employment. Critical to the model is the distinction between different types of capital with different depreciation rates. Intangible capital and equipment have high depreciation rates, leading these stocks to drop substantially when investment falls during a financial shock. This can cause output and employment to remain low for close to a decade, through the contribution of equipment and intangibles to production and labor demand. I show that the consequences of such a financial shock correspond to several features of the US Great Recession (2008-2014), especially the large drop in equipment and intangible capital. In the model, TFP and government spending shocks do not lead to such large declines in investment or persistent output decreases, so the model is also consistent with the more transitory output drops seen after non-financial recessions, where such shocks may have been more important.
Close

Details

Original languageEnglish
Number of pages57
Publication statusUnpublished - 17 Jan 2015

Discover related content
Find related publications, people, projects and more using interactive charts.

View graph of relations

Related by author

  1. Entrepreneurship, agency frictions and redistributive capital taxation

    Knowles, M. P. & Boar, C., 27 Aug 2017, (Unpublished) 52 p.

    Research output: Working paper

  2. The clarity incentive for issue engagement in campaigns

    Basu, C. & Knowles, M. P., 14 Jun 2017, (Unpublished) 29 p.

    Research output: Working paper

ID: 252070463

Top