nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒07‒04
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Governmentally amplified output volatility By Funashima, Yoshito
  2. Trust, Well-Being and Growth: New Evidence and Policy Implications By Yann Algan; Pierre Cahuc
  3. Technology, Skill, and Growth in a Global Economy By Jaewon Jung
  4. Impact of the Financial Crisis on Long-Term Growth By Barry P. Bosworth
  5. Risk, capital and financial crisis By Ghosh, Saibal
  6. Fiscal Policy in a Debt Crisis - A Model By Afflatet, Nicolas

  1. By: Funashima, Yoshito
    Abstract: Predominant government behavior is decomposed by frequency into several periodic components: updating cycles of infrastructure, Kuznets cycles, fiscal policy over business cycles, and election cycles. Little is known, however, about the theoretical impact of such cyclical behavior in public finance on output fluctuations. Based on a standard neoclassical growth model, this study intends to examine the frequency at which public investment cycles are relevant to output fluctuations. We find an inverted U-shaped relationship between output volatility and length of cycle in public investment. Moreover, with a numerical setting, we show that periodic behavior in public investment at low frequencies—such as updating cycles of infrastructure and Kuznets cycles—can cause aggravated output resonance.
    Keywords: Output volatility; Public investment; Resonance; Frequency
    JEL: E32 E62
    Date: 2015–06
  2. By: Yann Algan (Département d'économie); Pierre Cahuc (Department of Economics)
    Abstract: This survey reviews the recent research on trust, institutions, and economic development. It discusses the various measures of trust and documents the substantial heterogeneity of trust across space and time. The conceptual mechanisms that explain the influence of trust on economic performance and the methods employed to identify the causal impact of trust on economic performance are reviewed. We document the mechanisms of interactions between trust and economic development in the realms of finance, innovation, the organization of firms, the labor market, and the product market. The last part reviews recent progress to identify how institutions and policies can affect trust.
    Keywords: Trust; Growth; Economic Development; Institutions; Well-being
    JEL: O11 O43 Z13
    Date: 2014
  3. By: Jaewon Jung (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper develops an endogenous growth model based on a Roy-like assignment model in which heterogeneous workers endogenously sort into different technologies/tasks according to their comparative advantage. By modeling explicit distinction between worker skills and tasks, as well as incorporating taskspecific technologies, worker skill distribution and heterogeneous firms, we analyze in depth the technology-skill-growth and offshoring-growth links that are absent in traditional models of endogenous growth. The model provides therefore richer predictions on the relationship between labor market changes and growth due to technology up- and downgrading mechanism at both individual worker and firm levels.
    Keywords: Endogenous growth, Technology-augmented skill distribution,Worker/firm heterogeneity, Offshoring, Skill upgrading/polarization
    JEL: F43 J24 O4
    Date: 2015
  4. By: Barry P. Bosworth
    Abstract: This study examines the potential impact of the 2008-2009 financial crisis on economic growth. Expectations of future growth are critical to evaluating of the sustainability of overall budget trends and the financial condition of the Old-Age Survivors and Disability Insurance (OASDI) and Medicare trust funds. The paper includes an assessment of the experience of other industrial economies with similar situations in earlier decades. The Nordic countries achieved a relatively complete recovery within a period of 5-10 years, but the slump in economic growth in Japan has continued for over a quarter century. The analysis of the current experience in the United States focuses on recent changes in the supply of labor and capital and changes in the growth of total factor productivity (TFP). The large decline in the labor force participation rate is largely the result of demographic changes and not the recession. Similarly, the growth of TFP has slowed in recent years, but most studies perceive it as predating the onset of the recession. The paper finds that: - Even though they may not be directly due to the financial crisis, expectations have been cut back in a wide range of analyses of future growth prospects. - The recent decline in labor force participation is dominated by demographic changes that will continue in future decades. Only a small portion appears to be related to cyclical factors. - The growth in TFP has also slowed, but the change predates the financial crisis and is also likely to continue in future years. The policy implications of the findings are: - The economic assumptions that underlie current projections of government expenditure programs are likely to be overly optimistic, particularly because the changed expectations are not cyclical or temporary in nature.
    Date: 2015–06
  5. By: Ghosh, Saibal
    Abstract: Employing data on over 100 banks for Gulf Cooperation Council (GCC) countries during 1996-2011, we test the relation between risk and capital. The findings indicate that banks generally increase capital in response to an increase in risk, and not vice versa. Second, there is an uneven impact of regulatory pressure and market discipline on banks attitude towards risk and capital. Additionally, Islamic banks increased their capital as compared to conventional banks.
    Keywords: Z-score; capital; 2SLS; banks; Gulf Cooperation Council
    JEL: G21 G28
    Date: 2014–03–10
  6. By: Afflatet, Nicolas (Helmut Schmidt University, Hamburg)
    Abstract: In the existing literature, fiscal policy in times of budget crises is considered above all from an empirical point of view. Until now, no model explaining the processes and forces at work has been developed. This article closes this gap. The model presented is based on the theory of political business cycles and the market discipline hypothesis. Unemployment, the voters’ preference for a sustainable deficit policy and the probability of a sovereign default are the determinants influencing the deficit. As a result the deficit falls high if fiscal policy is effective in reducing unemployment, if voter prefer deficits rather than balanced budgets, if financial markets do not react to lasting deficits and if the natural rate of unemployment is high.
    Keywords: budget consolidation; debt crisis; political business cycles; market discipline hypothesis; economic voting
    JEL: H62
    Date: 2015–06–29

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