nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒03‒30
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Monetary policy and growth with trend inflation and financial frictions By Olmos, Lorena; Sanso Frago, Marcos
  2. Growth, unemployment and wage inertia By Xavier Raurich; Valeri Sorolla
  3. How Strongly are Business Cycles and Financial Cycles Linked in the G7 Countries? By Nikolaos Antonakakis; Max Breitenlechner; Johann Scharler
  4. Democracy Does Cause Growth By Daron Acemoglu; Suresh Naidu; Pascual Restrepo; James A. Robinson
  5. Trade Structure and Growth Effects of Taxation in a Two-Country World By Daisuke Amano; Jun-ichi Itaya; Kazuo Mino
  6. A Note on Oil and Gas Production from Shale and Long-Run U.S. Economic Growth By Arora, Vipin
  7. Growth Effects of Structural Reforms in Southern Europe: The case of Greece, Italy, Spain and Portugal By Janos Varga; Werner Roeger; Jan in 't Veld
  8. Medium-term Fluctuations and the "Great Ratios" of Economic Growth By Christian Groth; Jakob B. Madsen
  9. The Stock Market, the Real Economy and Contagion By Dirk G Baur; Isaac Miyakawa
  10. Perspectives on the U.S. economy and monetary policy By Plosser, Charles I.
  11. State-Dependent Effects of Fiscal Policy. By Steven Fazzari; James Morley; Irina Panovska
  12. OECD Forecasts During and After the Financial Crisis: A Post Mortem By Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson

  1. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: This paper studies the effects that conventional and unconventional monetary policies generate when endogenous growth, trend inflation and financial frictions are considered in a New Keynesian macroeconomic model. Financial variables play a key role in the determination of the steady state growth rate, given the value of the trend inflation. Calibrating the model following Gertler and Karadi (2011), long-run growth rate, welfare, normalized investment and financial wealth are maximized when trend inflation is 1.7% while leverage, external finance premium and marginal gain of the financial intermediaries are minimized. Finally, unconventional policies could extend their impact to the long run.
    Keywords: New Keynesian DSGE models, endogenous growth, financial frictions, trend inflation, unconventional monetary policy
    JEL: E31 E44 E58 O42
    Date: 2014
  2. By: Xavier Raurich (Facultat d'Economia i Empresa; Universitat de Barcelona (UB)); Valeri Sorolla (Univrsitat Autònoma de Barcelona)
    Abstract: We introduce wage setting via efficiency wages in the neoclassical one-sector growth model to study the growth effects of wage inertia. We compare the dynamic equilibrium of an economy with wage inertia with the equilibrium of an economy without it. We show that wage inertia affects the long run employment rate and that the transitional dynamics of the main economic variables will be different because wages are a state variable when wage inertia is introduced. In particular, we show that the model with wage inertia can explain some growth patterns that cannot be explained when wages are flexible. We also study the growth effects of permanent technological and fiscal policy shocks in these two economies. During the transition, the growth effects of technological shocks obtained when wages exhibit inertia may be the opposite of those obtained when wages are flexible. These technological shocks may have long run effects if there is wage inertia.
    Keywords: Wage inertia, Growth, Efficiency wages, Transitional dynamics, Unemployment.
    JEL: O41
    Date: 2014
  3. By: Nikolaos Antonakakis; Max Breitenlechner; Johann Scharler
    Abstract: In this study we examine the dynamic interactions between credit growth and output growth using the spillover index approach of Diebold and Yilmaz (2012). Based on quarterly data on credit growth and GDP growth over the period 1957Q1-2012Q4 for the G7 countries we find that: i) spillovers between credit growth and GDP growth evolve rather heterogeneously over time and across countries, and increase during extreme economic events. ii) Spillovers between credit growth and GDP growth are of bidirectional nature, indicating bidirectional causation between the financial and real sectors. iii) In the period shorty before and on the onset of the global financial crisis, the link between credit growth and GDP growth becomes more pronounced. In particular, the financial sector plays a dominant role during the early stages of the crisis, while the real sector quickly takes over as the dominant source of spillovers. iv) Interestingly, credit growth in the US is the dominant transmitter of shocks internationally, and especially to other countries' real sectors in the run up period to (and during) the global financial crisis. Overall, our results suggest feedback effects between the financial and the real sectors that create rippling effects within and between the G7 countries during the global financial crisis.
    Keywords: Business cycles, Financial cycles, Spillovers, Crisis, Recession
    JEL: C32 E32 E44 E51 F42
    Date: 2014–03
  4. By: Daron Acemoglu; Suresh Naidu; Pascual Restrepo; James A. Robinson
    Abstract: We provide evidence that democracy has a significant and robust positive effect on GDP. Our empirical strategy relies on a dichotomous measure of democracy coded from several sources to reduce measurement error and controls for country fixed effects and the rich dynamics of GDP, which otherwise confound the effect of democracy on economic growth. Our baseline results use a linear model for GDP dynamics estimated using either a standard within estimator or various different Generalized Method of Moments estimators, and show that democratizations increase GDP per capita by about 20% in the long run. These results are confirmed when we use a semiparametric propensity score matching estimator to control for GDP dynamics. We also obtain similar results using regional waves of democratizations and reversals to instrument for country democracy. Our results suggest that democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest. We find little support for the view that democracy is a constraint on economic growth for less developed economies.
    JEL: O10 P16
    Date: 2014–03
  5. By: Daisuke Amano (Otaru University of Commerce); Jun-ichi Itaya (Hokkaido University); Kazuo Mino (Kyoto University)
    Abstract: This paper explores the long-run impacts of tax policy in a two-country model of endogenous growth with variable labor supply. We focus on international spillover effects of tax reforms under alternative trade structures. It is shown that if the instantaneous utility function of the representative family in each country is additively separable and if international capital mobility is absent, then a change in taxation in one country does not directly affect capital formation in the other country. Such a conclusion is fundamentally modified if international lending and borrowing are allowed. In the presence of financial capital mobility, a change in tax policy in one country directly diffuses to the growth performance of the other country, even though preference structures are assumed to be log-additive forms.
    Keywords: factor-income tax, consumption tax, equilibrium dynamics, two-country model, endogenous growth, variable labor supply
    JEL: F43 O41
    Date: 2014–03
  6. By: Arora, Vipin
    Abstract: The short-term economic benefits of oil and gas production from shale for the U.S. economy have been widely discussed, but the long-term effects remain unclear. These long-run impacts likely depend upon the degree to which such oil and gas production can impact growth in capital per worker or technological progress throughout the economy. Oil or gas production from shale can lead to economic growth through economy-wide increases in capital per worker directly through investment in the oil and gas extraction sector and along the supply chain. Alternatively, the availability of low cost natural gas in large quantities may lead to replacement or additions to capital stock outside of oil and gas extraction and related industries. Oil and gas production can lead to economy-wide technology gains directly through the application of technologies used in extraction and related activities in other sectors. There is much greater upside and uncertainty, however, surrounding if such production can lead to technological growth in other sectors indirectly. Are there currently important and productive technologies not being used or applied that become plausible because of lower-cost natural gas? Will there be transformative technologies developed for use with lower-cost natural gas that currently do not exist? And might each of these individually lead to other technologies that currently do not exist?
    Keywords: Productivity; shale; economic growth; oil and gas
    JEL: E00 O40 Q33 Q43
    Date: 2014–03–24
  7. By: Janos Varga; Werner Roeger; Jan in 't Veld
    Abstract: This paper develops a semi-endogenous growth model for analysing the intertemporal effects of structural reforms in Southern European countries (Italy, Spain, Portugal and Greece). The model follows the product variety paradigm in a semi-endogenous setting, and includes a disaggregation of labour into different skill groups. We use a comprehensive set of structural indicators in order to calibrate the model to important macroeconomic ratios and levels of productivity and employment. Our results show that structural reforms yield significant economic gains in the medium and long run. The results point to the importance of product market reforms and labour market related education and tax reforms as the most promising areas of structural policy interventions. This paper also argues for placing more emphasis on education policy which is key in upgrading the labour force, especially in these countries where the share of low skilled labour is among the highest in the euro area.
    JEL: E10 O20 O30 O41
    Date: 2013–12
  8. By: Christian Groth (Department of Economics, Copenhagen University); Jakob B. Madsen (Department of Economics, Monash University)
    Abstract: Evidence for the OECD countries show that the “great ratios”, such as the unemployment rate, factor shares, Tobin’s q and the investment-capital ratio, fluctuate significantly on medium-term frequencies of 10-40 years duration. To explain these medium-term fluctuations, we establish a macro-dynamic model where the q-theory of investment is combined with sluggish real-wage adjustment in the labour market. In this framework, responses to shocks show persistence and amplification. A high degree of real-wage rigidity combined with a low elasticity of factor substitution leads to damped internal oscillations and hump-shaped impulse-response functions.
    Keywords: Medium-term cycles, Tobin’s q, real-wage Phillips curve, elasticity of factor substitution, endogenous oscillations
    JEL: E3 G1 O4
    Date: 2013
  9. By: Dirk G Baur (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Isaac Miyakawa (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: In this paper we analyze the link between stock market performance and macroe conomic performance for a large number of countries. We study the short-run and long-run relationships and find that stock market returns do not coherently predict future macroeconomic changes for the majority of countries, i.e. the estimates vary considerably both across prediction horizons and across countries. Moreover, we test whether the financial and real economy dynamic linkages increased in the financial crisis in 2008 implying “macro-financial” contagion. The crisis-specific analysis of macro-financial linkages broadens the perspective of existing studies of financial contagion. Our findings indicate that the stock market does not merely reflect future economic conditions but also influences them justifying policy responses as witnessed during the 2008 financial and economic crisis.
    Keywords: global stock markets; real economic activity; predictive regressions; contagion; financial crises; co-integration
    JEL: C22 C32 E44 G01 G14 G15 G18
    Date: 2014–01–01
  10. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Monetary Policy and Banks and the Rise of Global Protectionism; Global Interdependence Center; Banque de France; Paris, France President Charles Plosser offers his views on growth, unemployment, and inflation expectations. He also discusses why the Fed faces a communications challenge with the economy so close to the unemployment threshold of 6.5 percent. He gave similar remarks on March 6 in London.
    Keywords: Economy; Monetary policy; Economic conditions;
    Date: 2014–03–10
  11. By: Steven Fazzari (Washington University in St. Louis); James Morley (School of Economics, University of New South Wales); Irina Panovska (Rauch Business Center, Lehigh University)
    Abstract: We investigate the effects of government spending on U.S. output with a threshold structural vector autoregressive model. We provide formal comparisons for nonlinearity in the responses of output to government spending and develop a method to compare the difference between impulse response functions across states of the economy. Our empirical findings support state-dependent effects of fiscal policy. The government spending multiplier is larger and more persistent when capacity utilization is low. The estimated multiplier is large (1.6) for more than half of the sample observations, even when the interest rate is not at the zero lower bound.
    Keywords: Government Spending, Threshold Model, Vector Autoregression, Nonlinear Dynamics, Impulse-Response Comparison, Bayesian
    JEL: C32 E32 E62
    Date: 2013–12
  12. By: Nigel Pain; Christine Lewis; Thai-Thanh Dang; Yosuke Jin; Pete Richardson
    Abstract: This paper assesses the OECD’s projections for GDP growth and inflation during the global financial crisis and recovery, focussing on lessons that can be learned. The projections repeatedly over-estimated growth, failing to anticipate the extent of the slowdown and later the weak pace of the recovery – errors made by many other forecasters. At the same time, inflation was stronger than expected on average. Analysis of the growth errors shows that the OECD projections in the crisis years were larger in countries with more international trade openness and greater presence of foreign banks. In the recovery, there is little evidence that an underestimate of the impact of fiscal consolidation contributed significantly to forecast errors. Instead, the repeated conditioning assumption that the euro area crisis would stabilise or ease played an important role, with growth weaker than projected in European countries where bond spreads were higher than had been assumed. But placing these errors in a historical context illustrates that the errors were not without precedent: similar-sized errors were made in the first oil price shock of the 1970s. In response to the challenges encountered in forecasting in recent years and the lessons learnt, the OECD and other international organisations have sought to improve their forecasting techniques and procedures, to improve their ability to monitor near-term developments and to better account for international linkages and financial market developments. Prévisions de l'OCDE pendant et après la crise financière : Post mortem Ce document évalue les projections de l'OCDE relatives à la croissance du PIB et à l'inflation durant la crise financière mondiale et lors de la reprise, tout en mettant l'accent sur les leçons qui peuvent être tirées. Les projections ont surestimé la croissance de façon répétée, à défaut d'anticiper l'ampleur du ralentissement puis, plus tard, le faible rythme de la reprise — des erreurs commises par de nombreux autres prévisionnistes. Simultanément, l'inflation a été, en moyenne, plus forte que prévu. L'analyse des erreurs relatives à la croissance montre que les prévisions de l'OCDE durant les années de crise économiques ont été plus importantes dans les pays dotés d'une plus grande ouverture au commerce international et d'une plus grande présence de banques étrangères. Durant la reprise, il y a peu d'évidences qu'une sous-estimation de l'impact de la consolidation budgétaire ait conduit de manière significative aux erreurs. Au lieu de cela, l'hypothèse de conditionnement répétée que la crise de la zone euro devrait se stabiliser ou a joué un rôle important, avec une croissance plus faible que prévu dans les pays européens où les écarts de rendement des obligations étaient plus élevés que ce qui avait été supposé. Mais placer ces erreurs dans un contexte historique montre que les erreurs ne sont pas sans précédent: des erreurs de taille similaire ont été faites lors du premier choc des prix du pétrole dans les années 70. En réponse aux difficultés rencontrées dans les prévisions au cours des dernières années et les leçons apprises, l'OCDE et d'autres organisations internationales ont cherché à améliorer leurs techniques et procédures de prévision, afin d'améliorer leur capacité à surveiller l'évolution à court terme et à mieux appréhender les liens internationaux et l'évolution du marché financier
    Keywords: fiscal policy, inflation, forecasting, economic fluctuations, economic outlook, performance économique, prévisions, fluctuations économiques, inflation, politique budgétaire
    JEL: E17 E27 E31 E32 E37 E62 E66 F47 G01
    Date: 2014–03–17

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