nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒07‒18
three papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Fiscal Rules and Twin Deficits: The Link between Fiscal and External Balances By Harald Badinger; Aurélien Fichet de Clairfontaine; Wolf Heinrich Reuter
  2. How economists understand (or not) the relationship between the real and the financial economy. By Kenneth Hermele
  3. Rare Shocks vs. Non-linearities: What Drives Extreme Events in the Economy? Some Empirical Evidence By Michal Franta

  1. By: Harald Badinger (Department of Economics, WU Vienna); Aurélien Fichet de Clairfontaine (Department of Economics, WU Vienna); Wolf Heinrich Reuter (Department of Economics, WU Vienna)
    Abstract: This paper investigates the relationship between countries' fiscal balances and current accounts with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account via aggregate (import) demand is potentially amplified by indirect effects, materializing through interest rate effects and inter-generational transfers that reduce savings. On the other hand, the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through Ricardian equivalence considerations. We expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985-2012. As previous studies we find a positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis. However, the effect of fiscal balances on the current account depends on the stringency of fiscal (budget balance or debt) rules in place; it is reduced by one third on average and virtually eliminated for countries with the most stringent fiscal rules.
    Keywords: Twin Deficits, Fiscal Policy, Fiscal Rules, Current Account
    JEL: E62 F32 F41
  2. By: Kenneth Hermele (Human Ecology Division, Lund University)
    Abstract: Economists’ attempts to understand the relationship between the real and the financial economy, and the impact of the latter on the former, go back to the origins of economics but they have gained renewed strength with the financial crisis of 2008 and the resulting economic crisis. The relationship real-finance is variously portrayed as being non-important, mutually beneficial, or destructive, real economic activities losing out to pure speculation and wasteful consumption patterns. The various economics’ traditions takes concerning the pro- and cons of the rise of finance capital is discussed, and summarized in a table. In the process, classical and neo-classical, as well as Marxist, Neo-Schumpeterian and Ecological perspectives are discussed (and summarized in the Appendix). Three levels of the economy are investigated: the financial, the real (where production of goods and services take place) and the real-real, where the physical pre-conditions for the other two are located. The conclusion is that the various sectors cannot be understood in isolation from each other, and that some of the recipes for a resumption of healthy balance between finance and the real economy forget to anchor this vision in a clear understanding the limits to growth supplied by Ecological Economics.
    Keywords: Real economy, real-real economy, fictitious capital, productive capital, neutrality of money, veil of money, bubbles, financial euphoria. Correlation Index
    Date: 2015–01–01
  3. By: Michal Franta
    Abstract: A small-scale vector autoregression (VAR) is used to shed some light on the roles of extreme shocks and non-linearities during stress events observed in the economy. The model focuses on the link between credit/financial markets and the real economy and is estimated on US quarterly data for the period 1984–2013. Extreme shocks are accounted for by assuming t-distributed reduced-form shocks. Non-linearity is allowed by the possibility of regime switch in the shock propagation mechanism. Strong evidence for fat tails in error distributions is found. Moreover, the results suggest that accounting for extreme shocks rather than explicit modeling of non-linearity contributes to the explanatory power of the model. Finally, it is shown that the accuracy of density forecasts improves if non-linearities and shock distributions with fat tails are considered.
    Keywords: Bayesian VAR, density forecasting, fat tails, non-linearity
    JEL: C11 C32 E44
    Date: 2015–06

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