nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒09‒18
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis By Tetsuo Ono
  2. Long-lasting consequences of the European crisis By Jimeno, Juan F.
  3. Monetary policy during financial crises: Is the transmission mechanism impaired? By Jannsen, Nils; Potjagailo, Galina; Wolters, Maik H.
  4. Public debt, secular stagnation, and functional finance By Skott, Peter;
  5. Public debt, population ageing and medium-term growth By Dieppe, Alistair; Guarda, Paolo; Albani, Maria; González Pandiella, Alberto; Gordo Mora, Esther; Grech, Owen; Irac, Delphine; Kilponen, Juha; Kulikov, Dmitry; Marchiori, Luca; Mourinho Félix, Ricardo; Papadopoulou, Niki; Rodano, Lisa; Sideris, Dimitris; Vogel, Edgar
  6. Forms of Democracies and Financial Development By Pierre Mandon; Clément Mathonnat

  1. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study presents an overlapping-generations model featuring capital accumu- lation, collective wage-bargaining, and probabilistic voting over fiscal policy. We characterize a Markov-perfect political equilibrium of the voting game within and across generations and show the following results. First, greater bargaining power of unions lowers the growth rate of capital and creates a positive correlation between unemployment and public debt. Second, greater political power of the old lowers the growth rate and shifts government expenditure from the unemployed to the old. Third, when the government finances its spending by issuing public debt, an introduction of a balanced-budget requirement increases the growth rate but may benefit the old at the expense of the unemployed.
    Keywords: Economic Growth; Fiscal Policy; Government Debt; Unemployment; Voting
    JEL: E24 E62 H60
    Date: 2014–08
  2. By: Jimeno, Juan F.
    Abstract: The Great Recession and the subsequent European crisis may have long-lasting effects on aggregate demand, aggregate supply, and, hence, on macroeconomic performance over the medium and long-run. Besides the fact that financial crisis last longer and are succeeded by slower recoveries, and apart from the hysteresis effects that may operate after episodes of long-term unemployment, the combination of high (public and private) debt and low population and productivity growth may create significant constraints for monetary and fiscal policies. In this paper I develop an OLG model, one earlier used by Eggertsson and Mehrotra (2014) to rationalize the "secular stagnation hypothesis", to show how high debt, and low population and productivity growth may condition the macroeconomic performance of some European countries over the medium and long-run. JEL Classification: E20, E43, E52, E66
    Keywords: inter-generational transfers, natural rate of interest, population and productivity growth, secular stagnation, zero lower bound
    Date: 2015–07
  3. By: Jannsen, Nils; Potjagailo, Galina; Wolters, Maik H.
    Abstract: We study the macroeconomic effects of monetary policy during financial crises using a Bayesian panel vector autoregressive (PVAR) model for 20 advanced economies. We interact all of the endogenous variables with financial crisis dummies, which are constructed using the narrative approach. We also distinguish between an acute initial phase of financial crises and a subsequent recovery phase. We show that an expansionary monetary policy shock has large positive effects on output and inflation during the acute phase of a financial crisis. These effects are larger than those during non-crisis periods. Decreased uncertainty as well as increases in consumer confidence and share prices explain these large effects, whereas these variables are much less relevant for monetary policy transmission outside financial crises. Counterfactual analysis shows that the transmission mechanism would be impaired without the effects of monetary policy on these variables, where credit would not react at all and the response of output would be substantially lower. During the recovery phase of a financial crisis, output and inflation are generally non-responsive to monetary policy shocks.
    Keywords: monetary policy transmission,financial crisis,financial stability,state-dependence,uncertainty,panel VAR
    JEL: C33 E52 E58 G01
    Date: 2015
  4. By: Skott, Peter (University of Massachusetts Amherst and Aalborg University);
    Abstract: Fiscal policy and public debt may be required to maintain full employment and avoid secular stagnation. This conclusion emerges from a range of different models, including OLG specifications and stock-flow consistent (post-) Keynesian models. One of the determinants of the required long-run debt ratio is the rate of economic growth. Low growth leads to high debt, and empirical correlations between growth and debt may reflect this causal effect of growth on debt, rather than negative effects of debt on growth. A second result relates directly to austerity policies. The level of government consumption and the structure of taxation influence the required debt ratio and, paradoxically, austerity policies are counterproductive on their own terms: cuts in government consumption lead to an increase in the required level of debt.
    Keywords: functional finance, zero lower bound, liquidity trap, fiscal policy, secular stagnation, austerity, public debt.
    JEL: E62 E22
    Date: 2015
  5. By: Dieppe, Alistair; Guarda, Paolo; Albani, Maria; González Pandiella, Alberto; Gordo Mora, Esther; Grech, Owen; Irac, Delphine; Kilponen, Juha; Kulikov, Dmitry; Marchiori, Luca; Mourinho Félix, Ricardo; Papadopoulou, Niki; Rodano, Lisa; Sideris, Dimitris; Vogel, Edgar
    Abstract: This paper analyses the challenges that high public debt and ageing populations pose to medium-term growth. First, macroeconometric model simulations suggest that medium-term growth can benefit from credible fiscal consolidation, partly through reductions in sovereign risk premia. Second, a disaggregated growth accounting exercise suggests that the impact of population ageing on medium-term growth can be mitigated by structural reforms boosting labour force participation. Finally, general equilibrium models suggest that pay-as-you-go public pension systems will require reforms combining lower benefits, a later retirement age and higher social contributions. These findings suggest several policy recommendations: (a) “fiscal space” should be preserved to counter adverse shocks, (b) credible fiscal plans can benefit growth through the sovereign risk channel, (c) the demographic transition increases the need for improved fiscal policy coordination and more flexible labour migration policies, and (d) fiscal consolidation should avoid perverse incentive effects that could lower labour supply and medium-term growth. JEL Classification: E4, E5
    Keywords: ageing, fiscal consolidation, medium-term growth, pensions, sovereign debt, structural reforms
    Date: 2015–08
  6. By: Pierre Mandon (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I); Clément Mathonnat (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: The political economy of finance literature emphasizes the critical role of political institutions in promoting financial development. Related empirical findings highlight a robust positive effect of democratic regimes on financial development compared to dictatorships. However, no study focused so far on identifying the precise political institutions explaining the financial development enhancing effect of democracies. In this paper, we study the effects of disaggregated political institutions on financial development along three institutional dimensions, namely forms of government, electoral rules and state forms. Using a large panel of 140 countries over 1984-2007, we show that institutional details are of crucial importance, since the positive effect of democracies on financial development clearly depends on the precise institutional dimensions at work, namely: parliamentary governments and, to a lesser extent federal states. Thus, our study contributes to the institutional design debate, by showing that the simple promotion of democratic regimes might not be sufficient to foster financial development.
    Keywords: cerdi
    Date: 2015–09–09

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