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on Financial Development and Growth |
| By: | Tetsuo Ono (Graduate School of Economics, Osaka University) |
| Abstract: | This study presents a two-period overlapping-generations model featuring in- tergenerational conflict over fiscal policy. In particular, we characterize a Markov- perfect political equilibrium of the voting game between generations and show the following three main results. First, population aging incentivizes the government to invest more in capital for future public spending, positively affecting economic growth. Second, when the government finances its spending by issuing bonds, the introduction of the balanced budget rule results in a higher public spending-to-GDP ratio and a higher growth rate. Third, to obtain a normative implication of the po- litical equilibrium, we compare it with an allocation chosen by a benevolent planner who takes care of all future generations. The planner's allocation might feature less growth and more borrowing than the political equilibrium if the planner attaches low weights to future generations. |
| Keywords: | Economic Growth; Government Debt; Overlapping Generations; Pop- ulation Aging; Voting |
| JEL: | D72 D91 H63 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1423r2&r=fdg |
| By: | Cecchetti, Stephen G; Kharroubi, Enisse |
| Abstract: | We examine the negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity. Using a panel of 20 countries over 30 years, we establish that there is a robust correlation: the faster the financial sector expands, the slower the real economy grows. We then proceed to build a model in which this relationship arises from the fact that investment projects that are easier to pledge as loan collateral have lower productivity. As the financiers improve their ability to recover collateral in default, entrepreneurs expect credit to grow more quickly. As a consequence, they choose to invest in more pledgeable/less productive projects, reducing total factor productivity growth. We take this theoretical prediction to the data and find that financial growth disproportionately harms industries the less tangible their assets or the more R&D intensive they are. |
| Keywords: | asset tangibility; credit booms; financial development; growth; R&D intensity |
| JEL: | D92 E22 E44 O4 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10642&r=fdg |
| By: | Andrea Gerali (Bank of Italy); Alberto Locarno (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy) |
| Abstract: | This paper evaluates the direct and indirect effects of the sovereign debt crisis on Italy’s potential output. The direct effects are captured by the increase in the interest rate paid by Italian borrowers in the second half of 2011, the indirect effects by the policy responses to the crisis (fiscal consolidation and structural reforms). Using a New Keynesian dynamic general equilibrium model, we compute potential output as the “natural” level of output in the absence of nominal price and wage rigidities. The evaluation posits a no-crisis scenario in line with the pre-2011 potential output projections and government budget rules. We find first that the fiscal and financial shocks that caused the 2011-2013 recession subtracted 1.6 percentage points from potential output growth, while the structural reforms in 2013 have limited the reduction in output capacity to about 1.4 points; second, that the structural reforms have a long-run growth-enhancing impact on potential output of around 3 points from now to 2030; and third, that once budget balance is achieved in the medium term (2019), reductions in either labor or capital income taxes would boost potential output growth by about 0.2 points per year. |
| Keywords: | sovereign risk, fiscal policy, potential output |
| JEL: | C51 E31 E52 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1010_15&r=fdg |