nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒07‒25
three papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Reflecting on ‘An economic model of social capital and health’ By Martin Knapp
  2. Growth and Trade with Frictions: A Structural Estimation Framework By James E. Anderson; Mario Larch; Yoto V. Yotov
  3. Small DSGE Model with Financial Frictions By Melesse Wondemhunegn Ezezew

  1. By: Martin Knapp
    JEL: J1
    Date: 2015–06–21
  2. By: James E. Anderson; Mario Larch; Yoto V. Yotov
    Abstract: We build and estimate a structural dynamic general equilibrium model of growth and trade. Trade affects growth through changes in consumer and producer prices that in turn stimulate or impede physical capital accumulation. At the same time, growth affects trade, directly through changes in country size and indirectly through altering the incidence of trade costs. The model combines structural gravity with a capital accumulation specification of the transition between steady states. Theory translates into an intuitive econometric system that identifies the causal impact of trade on income and growth, and also delivers estimates of the key structural parameters in our model. Counterfactual experiments based on the estimated model give evidence for strong dynamic relationships between growth and trade, resulting in doubling of the static gains from trade liberalization.
    JEL: F10 F43 O40
    Date: 2015–07
  3. By: Melesse Wondemhunegn Ezezew (Department of Economics, University Of Venice Cà Foscari)
    Abstract: In the last few years, macroeconomic modelling has emphasised the role of credit market frictions in magnifying and transmitting nominal and real disturbances and their implication for macro-prudential policy design. In this paper, we construct a modest New Keynesian general equilibrium model with active banking sector. In this set-up, the financial sector interacts with the real side of the economy via firm balance sheet and bank capital conditions and their impact on investment and production decisions. We rely on the financial accelerator mechanism due to Bernanke et al. (1999) and combine it with a bank capital channel as demonstrated by Aguiar and Drumond (2007). We calibrate the resulting model from the perspective of a low income economy reflecting the existence of relatively high investment adjustment cost, strong fiscal dominance, and underdeveloped financial and capital markets where the central bank uses money growth in stabilizing the national economy. Then we examine the impulse response of selected endogenous variables to shocks stemming from the fiscal authority, the monetary policy process, and technological progress. The findings are broadly consistent with previous studies that demonstrated stronger role for credit market imperfections in amplifying and propagating monetary policy shocks. Moreover, we also compare the trajectory of the model economy under alternative monetary policy instruments. The results suggest that the model with money growth rule generates higher volatility in output and inflation than the one with interest rate rule.
    Keywords: Firm net worth, bank equity, monetary policy transmission, macro-prudential regulation, business cycle
    JEL: E32 E44 E50 C68
    Date: 2015

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