nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒11‒17
five papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Inequality, growth and welfare: The main links By Joël Hellier; Stéphane Lambrecht
  2. International trade and Economic growth: cross-country evidence By Josheski, Dushko; Lazarov, Darko
  3. The Impact of the Business Cycle on Elasticities of Tax Revenue in Latin America By Roberto Machado; José Zuloeta
  4. Unsustainable Sovereign Debt - is the Euro Crisis only the Tip of the Iceberg? By Natasa Bilkic; Ben Carreras Painter; Thomas Gries
  5. Fiscal Austerity Measures: Spending Cuts vs. Tax Increases By Gerhard Glomm; Juergen Jung; Chung Tran

  1. By: Joël Hellier (EQUIPPE, Univ. of Lille 1 and LEMNA, Univ. of Nantes); Stéphane Lambrecht (EQUIPPE, Univ. of Lille 1 and Univ. of Valenciennes)
    Abstract: We review the literature on the links between inequality, growth and welfare. Three questions are addressed: 1) What is the impact of growth and development on inequality? 2) What is the impact of inequality on growth, development and welfare? 3) What is the impact of proequality public policies upon growth and welfare? As regards the first question, the theoretical and empirical literature that analyses Kuznets hypothesis is firstly reviewed. The answer to the question of the impact of inequality on growth is twofold. Firstly, inequality fosters growth when this is based on capital accumulation, but it hinders growth when growth is based on human capital accumulation and when inequality-related social disturbances are considered. Identically, pro-equality public policies may engender very different effects upon growth depending on their influence on factor accumulation. These mixed impacts may explain the ambiguous findings provided by the empirical literature. If most of the estimates carried out in the 1990s seemed to confirm that inequality was damaging for growth, the 2000s empirical literature reconsiders this diagnosis but remains inconclusive.
    Keywords: Inequality, Growth, Welfare.
    JEL: D31 D63 I38 O15 O4
    Date: 2012–06
  2. By: Josheski, Dushko; Lazarov, Darko
    Abstract: Many empirical studies have been done to investigate whethere growth is influenced by international trade. But despite the great effort that has been devoted to studying the issue, there is little persuasive evidence concerning the effect of trade on growth. The main subject of our paper is to summarize the main findings based on empirical research that have been done to investigate the relationship between the trade and economic growth by using data for 208 regions and countries in OLS regression analysis. Our results from empirical investigation show: 1) the ratio of trade volume (sum of exports and imports at current prices-current openness or sum of exports plus sum of imports) to GDP as a proxy of trade openness has positive effect on economic growth, 2) black market premium as a proxy for imbalance in macroeconomic policies has negative effect, 3) in the presence of macroeconomic policies, trade has statistically and economic significant positive influence on growth, and 4) in an institutional environment trade lacks influencing growth, the coefficient on institutions is positive and statistically significant.
    Keywords: International trade, economic growth, institutions, macroeconomic imbalances
    JEL: F43
    Date: 2012–09–17
  3. By: Roberto Machado; José Zuloeta
    Abstract: This paper estimates short-run and long-run elasticities of tax revenue with respect to GDP in eight Latin American countries using quarterly data. Taxes considered are corporate income tax (CIT), personal income tax (PIT), value-added tax (VAT), and overall taxes. Results indicate that long-run elasticities are statistically and economically larger than 1, whereas short-run elasticities appear not to be statistically different from zero in the majority of cases. Tax systems seem very elastic in Argentina, Colombia, Ecuador, Peru, and Venezuela. The CIT exhibits the largest estimated long-run elasticity in most countries. Focusing on short-run elasticities that show statistical significance, only the CIT in Colombia and the PIT in Brazil and Colombia show larger fluctuations over the business cycle than growth potential in the long run. Overall, our results indicate that tax systems in Latin America are significantly more elastic than previous estimations.
    Keywords: Economics :: Economic Development & Growth, Economics :: Production & Business Cycles, Tax revenue, Elasticities, Business cycles,
    JEL: E32 H24 H25 H29
    Date: 2012–09
  4. By: Natasa Bilkic (University of Paderborn); Ben Carreras Painter (University of Paderborn); Thomas Gries (University of Paderborn)
    Abstract: As a direct effect of the financial crisis in 2008, public debt began to accumulate rapidly, eventually leading to the European sovereign debt crisis. However, the dramatic increase in government debt is not only happening in European countries. All major G7 countries are experiencing similar developments. What are the implications of this kind of massive deficit and debt policy for the long term stability of these economies? Are there limits in debt-ratios that qualitatively change policy options? While theory can easily illustrate these limits, where are these limits in real economies? This paper examines the relationship between sovereign debt dynamics and capital formation, and accounts for the effects of the 2008 financial crisis on debt sustainability for the four largest advanced economies. We contribute to the literature on fiscal sustainability by framing the problem in an OLG model with government debt, physical capital, endogenous interest rates, and exogenous growth. For the calibration exercise we extract data from the OECD for Germany as a stabilization anchor in Europe, the U.S., the U.K., and Japan for almost two decades before the 2008 crisis. Except for intertemporal preferences all parameters are drawn or directly derived from the OECD database, or endogenously determined within the model. The results of the calibration exercise are alarming for all four countries under consideration. We identify debt ceilings that indicate a sustainable and unsustainable regime. For 2011, all four economies are either close to-, or have already passed the ceiling. The results call for a dramatic re-adjustment in budget policies for a consolidation period and long-term fiscal rules that make it possible to sustain sufficient capital intensity so that these economies can maintain their high income levels. Current conditions are already starting to restrict policy choices. However, the results also make it very clear that none of these economies would survive a second financial crisis such as the one in 2008.
    Keywords: fiscal sustainability, primary deficit, debt ceiling, fiscal rules, OLG, calibration, advanced economies
    JEL: H62 H63 E62 G01
    Date: 2012–09
  5. By: Gerhard Glomm; Juergen Jung; Chung Tran
    Abstract: We study the macroeconomic and welfare effects of decumulating government debt in an overlapping generations model with skill heterogeneity and productive and non-productive government programs. Our results are: First, in the small open economy model calibrated to Greece, the spending-based austerity reform dominates the tax-based reform with respect to income effects but not with respect to the welfare effect. A mixed reform combining the tax-based and spending-based measures results in the largest welfare effects of up to 1.8 percent of pre-reform consumption. Second, the welfare effects vary significantly along the transition to the post reform steady state, depending not only on fiscal austerity measures, but also on skill types, working sectors and generations. When consumption taxes adjust the aggregate welfare effects are positive but the current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries. Third, interactions between fiscal distortions and the risk premium as well as accessibility to international capital markets strongly influence the effects of fiscal austerity. Larger growth and welfare effects are observed when the risk premium is larger than zero and when access to international capital markets is restricted.
    JEL: E21 E63 H55 J26 J45
    Date: 2012–11

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