nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒11‒07
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. The Role of Government Debt in Economic Growth By António Afonso; José Alves
  2. Social capital and economic growth in Europe: nonlinear trends and heterogeneous regional effects By Jesús Peiró-Palomino
  3. The Macroeconomic Effects of Fiscal Consolidation in Dynamic General Equilibrium By Tim Schwarzmüller; Maik Wolters
  4. Sovereign Debt Maturity and Debt-to GDP Dynamics in Six Euro Area Countries By Juan Equiza Goni
  5. The Public Finance and the Economic Growth in the First Portuguese Republic By Nuno Ferraz; António Portugal Duarte
  6. The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland By Nidhaleddine Ben Cheikh; Christophe Rault

  1. By: António Afonso; José Alves
    Abstract: We study the effect of public debt on economic growth for annual and 5-year average growth rates, as well as the existence of non-linearity effects of debt on growth for 14 European countries from 1970 until 2012. We also consider debt-to-GDP ratio interactions with monetary, public finance, institutional and macroeconomic variables. Our results show a negative impact of -0.01% for each 1% increment of public debt, although debt service has a 10 times worse effect on growth. In addition, we find average debt ratio thresholds of around 75%. Belonging to the Eurozone has a detrimental effect of at least -0.5% for real per capita GDP, and the banking crisis is the most harmful crisis for growth.
    Keywords: government debt, economic growth, debt thresholds.
    JEL: E62 H63 O47
    Date: 2014–09
  2. By: Jesús Peiró-Palomino (Department of Economics, University Jaume I, Castellón, Spain)
    Abstract: After two decades of academic debate on the social capital-growth nexus, discussion still remains open. Most of the literature so far, however, has followed the one-size-its-all approach, neglecting that the great disparities across geographical units might have implications in this relationship. This article analyzes the role of two social capital indicators on the growth of 237 European regions in the period 1995–2007 by implementing a set of both parametric and non- parametric regressions. Whereas the former impose a linear functional form for the parameters, the latter relax this assumption providing a flexible frame in which the functional form is given by the data. The technique also permits introducing parameter heterogeneity in the analysis by estimating individual regional effects. The results from the parametric analysis show that the sign and the magnitude of the effects hinge upon the indicator considered. In contrast, results from the nonparametric regressions suggest that, while both indicators are significant growth predictors, the effect departs from linearity. Moreover, not all regions benefit from social capital with the same intensity. The most notable difference lies in regions from Central and Eastern Europe countries, where social capital is mostly negative. Other regional conditions such as initial income levels, investment rates or the stock of human capital show a more limited influence.
    Keywords: Economic growth, European regions, nonparametric regression, social capital
    JEL: C14 R11 Z13
    Date: 2014
  3. By: Tim Schwarzmüller; Maik Wolters
    Abstract: We provide a systematic analysis of fiscal consolidation in a medium-scale dynamic general equilibrium model. Our results show that the choice of the consolidation instrument is very important, not only with respect to the short- and long-run output effects of the different consolidation strategies, but also regarding the welfare effects and the distributional consequences. Moreover, we show that these aspects become even more important if fiscal consolidation has to be conducted at a binding zero lower bound on nominal interest rates because in this case the negative short-run output costs increase. Our comprehensive analysis of the transmission channels of various fiscal consolidation measures shows that in particular the presence of credit-constrained households who cannot smooth consumption has a large impact on the overall output and welfare effects of fiscal consolidation. Further, it turns out to be important whether a fiscal instrument directly affects private production factors negatively as it is the case for consolidation via government investment and taxes on labor and capital. In these cases the short-run output contraction is large and persistent because either the private or the public capital stock decreases. By contrast, for a consolidation via government consumption, transfers or the consumption tax rate, output recovers much faster
    Keywords: fiscal consolidation, government debt, distortionary taxes, zero lower bound, welfare, monetary-fiscal policy interaction
    JEL: E32 E62 E63 H61 H62 H63
    Date: 2014–09
  4. By: Juan Equiza Goni
    Abstract: At a time when debt-to-GDP ratios are closely monitored in the Euro area, thispaper generates a set of stylized facts about sovereign debt and yields. First, Ipresent a new dataset on outstanding debt securities and yields for six EA countries(Belgium, Finland, France, Germany, Italy and Spain) from 1991 to 2013 that Ibuilt combining different sources. Thus, I can document, for example, that EAdebt duration increased by 2 years, mainly driven by demand. Second, based onthe government budget constraint, I calculate past contributions of returns on debtwith different maturities, inflation and other factors to EA debt-to-GDP changes andcompare them with the US experience. While primary deficits played an importantrole in the latter, returns on debt is the key factor in EA countries, especially whenlarge capital gains were paid to long-term bondholders before the introduction of theEuro. Also, although GDP growth contributions were similar, the EA relied moreon inflation and the US on real output growth. Finally, I estimate that 1% futurepermanently higher inflation would reduce EA debt ratios by 4%, an effect 2.4 timeshigher than the expected change in the US.
    JEL: E23 E31 E43 G12 H63
    Date: 2014–10
  5. By: Nuno Ferraz (Economic Advisor at the Portuguese Parliament and PhD Student at ISEG, Portugal); António Portugal Duarte (Faculty of Economics, Uniuversity of Coimbra and GEMF, Portugal)
    Abstract: The end of the 19th century was marked by several events which were extremely important to Portugal. The consequences of these events would later be responsible for the fall of the Monarchy and, thus, for the birth of the Republic. The first Republic was officially proclaimed on the 5th October 1910, and had a relatively short lifetime. This regime was later abolished by a military dictatorship. During most of its duration, the First Republic was marked by economic, financial, political and social instability. However, the Portuguese economic scenario started to change and improved by the end of this regime and, consequently, before the beginning of the Military Dictatorship, which ended up taking advantage of the ‘new’ and more favourable economic situation of the country. Additionally we find evidence that in the first two civil years of the Military Dictatorship, the real GDP grew sharply and above our prediction, and the public debt as percentage of GDP, had a more significant reduction then predicted.
    Keywords: Economic growth, First Republic, Public finance, Portugal.
    JEL: C01 H63 N13 O11
    Date: 2014–09
  6. By: Nidhaleddine Ben Cheikh; Christophe Rault
    Abstract: In this paper we investigate whether exchange rate pass-through (ERPT) responds nonlinearly to economic activity along the business cycle. Using quarterly data spanning the period 1975:1 to 2011:1, we explore the existence of nonlinearities in ERPT to CPI inflation for the Finnish economy. Within a logistic smooth transition framework, our investigations reveal a strong regime-dependence of pass-through, depending positively on economic activity. Besides, point estimates indicate that the long-run pass-through coefficient is equal to 0.15% (weakly significant) when GDP growth is below a threshold of 3%. However, when the Finnish economy’s growth rate speeds up - above the threshold of 3% - ERPT elasticity increases to 0.47%. These results provide some useful guidance on how policymakers should act over different phases of the business cycle. More specifically, monetary policy should factor in the nonlinear mechanism of ERPT over the business cycle in order to prevent exchange rate movements from fueling a continuous inflationary process.
    Keywords: Exchange rate pass-through, Inflation, Business cycle, Smooth Transition Regression models
    JEL: C22 E31 F31
    Date: 2014–06–01

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