nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2008‒10‒21
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Proposals for Effectively Regulating the U.S. Financial System to Avoid Yet Another Meltdown By James Crotty; Gerald Epstein
  2. Financialization: What it is and Why it Matters By Thomas I. Palley
  3. Booms and Busts in Latin America: The Role of External Factors By Alejandro Izquierdo Author-X-Name_First: Alejandro Author-X-Name_Last: Izquierdo; Randall Romero Author-X-Name_First: Randall Author-X-Name_Last: Romero; Ernesto Talvi Author-X-Name_First: Ernesto Author-X-Name_Last: Talvi

  1. By: James Crotty (University of Massachusetts Amherst); Gerald Epstein (University of Massachusetts Amherst and Political Economy Research Institute (PERI))
    Abstract: It is now clear that we are in the midst of the worst financial crisis since the Great Depression. This crisis is the latest phase of the evolution of financial markets under the radical financial deregulation process that began in the late 1970s. This evolution has taken the form of cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms that end in crises. Governments respond to crises with bailouts that allow new expansions to begin. As a result, financial markets have become ever large and financial crises have become more threatening to society, which forces governments to enact ever larger bailouts. This process culminated in the current global financial crisis, which is so deep rooted that even unprecedented interventions by affected governments have thus far failed to contain it. In this paper we first analyze a series of structural flaws in the current financial system that helped bring on the current crisis, and then propose a nine point regulation policy, informed by our analysis, designed to end this destructive dynamic. We believe that if enacted and vigorously enforced, the policy could sharply reduce financial instability and minimize the problems caused by future financial cycles. JEL Categories:
    Date: 2008–10
  2. By: Thomas I. Palley (Economics for Democratic & Open Societies, Washington DC, and Visiting Scholar at the Macroeconomic Policy Institute (IMK), Germany)
    Abstract: Financialization is a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector; (2) transfer income from the real sector to he financial sector; and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may render the economy prone to risk of debt-deflation and prolonged recession. Financialization operates through three different conduits: changes in the structure and operation of financial markets; changes in the behavior of non-financial corporations, and changes in economic policy. Countering financialization calls for a multi-faceted agenda that (1) restores policy control over financial markets, (2) challenges the neo-liberal economic policy paradigm encouraged by financialization, (3) makes corporations responsive to interests of stakeholders other than just financial markets, and (4) reforms the political process so as to diminish the influence of corporations and wealthy elites.
    Keywords: Financialization, neo-liberal policy, deregulation, debt, financial fragility.
    JEL: E61 E62 E63 E64 E65
    Date: 2008
  3. By: Alejandro Izquierdo Author-X-Name_First: Alejandro Author-X-Name_Last: Izquierdo; Randall Romero Author-X-Name_First: Randall Author-X-Name_Last: Romero; Ernesto Talvi Author-X-Name_First: Ernesto Author-X-Name_Last: Talvi
    Abstract: This paper analyzes the relevance of external factors in average quarterly GDP growth for 1990-2006 in the seven largest Latin American countries (LAC7). Modeling the relationship between LAC7 GDP and several external factors, it is found that those factors account for a significant share of variance in LAC7 GDP growth, and that external shocks produce significant responses. Likewise, a significant share of recent LAC7 growth performance can be explained by an external factor “tailwind. ” Also evaluated is the impact of deterioration in external financial conditions. Finally, the relevance of these findings for policy evaluation is emphasized. Growth performance, the strength or weakness of macroeconomic fundamentals and the impact of domestic macro and micro policies on growth can only be properly appraised by first filtering out the effects of external factors.
    Date: 2008–02

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