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on Financial Development and Growth |
| By: | Gomes, Orlando |
| Abstract: | The new Keynesian monetary policy model studies the response of the inflation – output gap trade-off to policy decisions taken by the Central Bank, concerning the nominal interest rate time trajectory. Under an optimal setup, this model displays a saddle-path stable equilibrium and, if the stable trajectory is followed, the steady state is characterized by an inflation rate that coincides with the selected inflation target. A high inflation target has positive effects over the rise of effective output relatively to its potential level (the monetary policy problem captures this effect), but it has a perverse impact over investment decisions (the referred problem does not capture this effect, taking it as granted). This second relation can be understood by associating to the first macro model a second setup, which takes consumption and investment decisions, i.e., by considering a long term growth setup. The link between the two is present on the impact of inflation over investment decisions. With this integrated framework one is able to simultaneously study short and long-run macroeconomic phenomena and to jointly analyze the behaviour of nominal and real aggregates. The most important results consist on the determination of an optimal inflation target and on the consideration of short term supply shocks as having a long-run impact producing business cycles. |
| Keywords: | Monetary policy; Economic growth; Inflation targeting; Output gap. |
| JEL: | C61 O41 E52 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2849&r=fdg |
| By: | Olga Arratibel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frigyes Ferdinand Heinz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Reiner Martin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcin Przybyla (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucasz Rawdanowicz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roberta Serafini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Tina Zumer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Overall, the prospects for a continued and reasonably fast real convergence process between the EU8 countries and the euro area are good. However, the continuation of the rapid progress made by many EU8 countries in the past cannot be taken for granted. In fact, in order to ensure that fast economic growth in the EU8 countries remains sustainable, it is crucial for these economies to take appropriate policy action. First it is important to recall that sound macroeconomic policies including credible monetary policy and appropriate fiscal policy are essential to ensure the appropriate framework conditions for further growth and convergence. Second, they need to address structural labour market problems, in particular by reducing regional and skill mismatches. Third, they must make further efforts to improve the business environment, in order to ensure that the capital accumulation process continues and R&D investments increase. Many of the above-mentioned facets of growth-enhancing policy will also help to ensure a continued inflow of foreign direct investment (FDI), which in turn is expected to help accelerate the convergence process. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20070061&r=fdg |
| By: | Gomes, Orlando |
| Abstract: | Recent literature on financial development and growth has highlighted the possibility of endogenous business cycles arising for particular levels of a given credit multiplier. These studies concentrate on loans directed to the productive activity and neglect the role of credit to consumption. In this note, we consider an endogenous growth model, where a representative agent must choose how to allocate credit; basically, the agent considers a simple rule where the share of credit to consumption reacts to deviations of the consumption – wealth ratio relatively to the corresponding steady state level. The setup generates nonlinear dynamics, which are analyzed both locally and globally. |
| Keywords: | Financial development; Credit to consumption; Endogenous growth; Endogenous cycles; Nonlinear dynamics. |
| JEL: | C61 O16 E32 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2889&r=fdg |