nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒04‒05
four papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial Crisis, Firm Dynamics and Aggregate Productivity in Japan By HOSONO Kaoru
  2. "What Role for Central Banks in View of the Current Crisis?" By Philip Arestis; Elias Karakitsos
  3. IS U.S. MONEY CAUSING CHINA'S OUTPUT? By Johansson, Anders C.
  4. What do we know and not know about potential output? By Susanto Basu; John G. Fernald

  1. By: HOSONO Kaoru
    Abstract: Using a dynamic general equilibrium model of firm dynamics that incorporates financial intermediation costs, we quantify the degree to which the deterioration in the health of banks during the Japanese banking crisis had an impact on aggregate productivity through firm dynamics. We find that the deterioration of bank health accounts for about 20 percent to 30 percent of the actual decline in the de-trended TFP during the crisis period (1996-2002). Our results suggest that differential impacts of financial intermediation costs between more and less productive firms or between entrants and incumbents are essential to quantitatively assess the aggregate consequences of financial crises.
    Date: 2009–04
  2. By: Philip Arestis; Elias Karakitsos
    Abstract: Central banks have an aversion to bailing out speculators when asset bubbles burst, but ultimately, as custodians of the financial system, they have to do exactly that. Their actions are justified by the goal of protecting the economy from the bursting of bubbles; while their intention may be different, the result is the same: speculators, careless investors, and banks are bailed out. The authors of this new Policy Note say that a far better approach is for central banks to widen their scope and target the net wealth of the personal sector. Using interest rates in both the upswing and the downswing of a (business) cycle would avoid moral hazard. A net wealth target would not impede the free functioning of the financial system, as it deals with the economic consequences of the rise and fall of asset prices rather than with asset prices (equities or houses) per se. It would also help to control liquidity and avoid future crises. The current crisis has its roots in the excessive liquidity that, beginning in the mid 1990s, financed a series of asset bubbles. This liquidity was the outcome of “bad” financial engineering that spilled over to other banks and to the personal sector through securitization, in conjunction with overly accommodating monetary policy. Hence, targeting net wealth would also help control liquidity, the authors say, without interfering with the financial engineering of banks.
    Date: 2009–03
  3. By: Johansson, Anders C. (China Economic Research Center)
    Abstract: This paper tries to answer the long-standing question of whether money causes output. Instead of focusing on domestic monetary policy and output, we analyze U.S. monetary policy and its possible effects on real output in China. Our results indicate that U.S. money supply Granger causes China’s real output, but that an alternative monetary instrument, the Federal Fund Rate, does not. Furthermore, there is a significant cointegrating relationship between U.S. money and China’s output, which means that there is a long-run relationship between them. Impulse response functions and variance decompositions also support the results, showing that shocks in the U.S. money supply have an effect on China’s real output. The results have important implications for policy makers in China that focus on maintaining a high and stable economic growth. They also have implications for U.S. policy makers. A number of countries around the world still fix their currencies against the U.S. dollar, which means that U.S. monetary policy has effects not only domestically but also in these countries.
    Keywords: China; United States; Monetary policy; Output; Causality; VECM
    JEL: C32 E40 E51 E52 E58
    Date: 2009–03–15
  4. By: Susanto Basu; John G. Fernald
    Abstract: Potential output is an important concept in economics. Policymakers often use a one-sector neoclassical model to think about long-run growth, and often assume that potential output is a smooth series in the short run--approximated by a medium- or long-run estimate. But in both the short and long run, the one-sector model falls short empirically, reflecting the importance of rapid technical change in producing investment goods; and few, if any, modern macroeconomic models would imply that, at business cycle frequencies, potential output is a smooth series. Discussing these points allows us to discuss a range of other issues that are less well understood, and where further research could be valuable.
    Keywords: Input-output analysis ; Productivity ; Monetary policy CL HG2567 S3A5
    Date: 2009

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