(Endogenous) Growth Slowdowns

We present a model where temporary shocks can lead to permanent changes in the rate of growth of total factor productivity (TFP).

Abstract: We present a model where temporary shocks can lead to permanent changes in the rate of growth of total factor productivity (TFP). The model features matching between basic research and development within an expanding variety semi-endogenous growth model. Search externalities generate vicious and virtuous research cycles. The model has a unique equilibrium path but multiple balanced growth paths (BGPs). After a long-lived or deep financial shock, the economy can transit between these BGPs, generating “super-hysteresis" in TFP. We analyze the model in the context of the Japanese growth slowdown and show that it can explain almost all of the TFP growth decline after the financial crisis in the early 1990s. Demographic shocks combined with a long-lasting financial crisis proved to be the “wretched coincidence" that led to the growth slowdown.

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