TFP During a Credit Crunch
46 Pages Posted: 24 Sep 2010 Last revised: 20 Sep 2012
Date Written: April 1, 2012
The financial crisis of 2008 was followed by sharp contractions in aggregate output and The financial crisis of 2008 was followed by sharp contractions in aggregate output and employment and an unusual increase in aggregate total factor productivity (TFP). This paper attempts to explain these facts by modeling the creation and destruction of jobs in the presence of heterogeneity in firm productivity and frictional credit and labor markets. The aggregate level of TFP is determined by both the underlying distribution of firm productivity and the structures of the credit and labor markets. Adverse shocks to credit markets destroy the least productive jobs and slow job creation, thus raising aggregate TFP and unemployment, and reducing output.
Keywords: Aggregation, Productivity, Search, Financial frictions, Business cycles
JEL Classification: J64, E44, E32
Suggested Citation: Suggested Citation