nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒01‒29
eight papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Excess Finance and Growth: Don't Lose Sight of Expansions ! By Thomas Grjebine; Fabien Tripier
  2. The Effects of Barriers to Technology Adoption on Japanese Prewar and Postwar Economic Growth By Daisuke Ikeda; Yasuko Morita
  3. Taming macroeconomic instability : monetary and macro prudential policy interactions in an agent-based model By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  4. Climate, Technological Change and Economic Growth By George Adu and Paul Alagidede
  5. The macroeconomic effects of oil price shocks on ASEAN-5 economies By Raghavan, Mala
  6. Do Mature Economies Grow Exponentially? By Steffen Lange; Peter P\"utz; Thomas Kopp
  7. Economic Volatility and Sovereign Yields’ Determinants: a Time-Varying Approach By António Afonso; João Tovar Jalles
  8. Persistent Liquidity By Giulia Ghiani; Max Gillman; Michal Kejak

  1. By: Thomas Grjebine; Fabien Tripier
    Abstract: Accompanying the great recession, a recent empirical literature casts doubt on the existence of a positive relationship between economic and financial growth pointing out the economic costs of excessive financial growth. We show however that if one considers the complete growth cycle, that is by including expansions into a growth cycle accounting procedure, the elasticity between financial and economic growth rates is positive for most financial series, even if high financial growth makes recessions more severe. This elasticity should be however adjusted downward, and may even turn negative, if one considers the persistent effects of financial growth on the expansion of the subsequent cycle. This effect can explain the pattern of economic growth observed during and after financial bubbles.
    Keywords: Growth;Business Cycles;Finance;Financial Cycles;Bubbles
    JEL: E32 E44
    Date: 2015–12
  2. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently Financial System and Bank Examination Department, E-mail:; Yasuko Morita (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan@(E-mail:
    Abstract: Following the start of modern economic growth around the mid- 1880s, Japanfs economy continued to substantially lag behind leading economies before World War II, but achieved rapid catch-up after the war. To explain the patterns, we build a dynamic model and examine the role of barriers to technology adoption. We find such barriers hampered catch-up in the prewar period and explain about 40 percent of the postwar miracle. Taking a historical perspective, we argue that factors that acted as barriers include low capacity to absorb technology, economic and political frictions with the outside world, and a lack of competition.
    Keywords: Japan, Barriers to technology adoption, Investment specific technology, Catch-up, Postwar miracle
    JEL: N15 N75 O11 O41
    Date: 2016–01
  3. By: Lilit Popoyan (Institute of Economics, (LEM)); Mauro Napoletano (OFCE Sciences Po and Skema Businnes School); Andrea Roventini (Institute of Economics, (LEM))
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macroprudential regulations and their possible interactions with dierent monetary policy rules.The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple- mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplifiedregulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro prudential regulation
    Keywords: Macro-prudential policy, Basel III regulation, financial stability, monetary policy, agent-based computational economics.
    JEL: C63 E52 E6 G01 G21 G28
    Date: 2015–12
  4. By: George Adu and Paul Alagidede
    Abstract: This paper investigates the incentive for developing adaptation technology in a world with changing climate within the directed technical change framework. Consistent with the market size effect, we show that technological change will tend to be biased in favour of the sector that employs the greater share of the work force over time, when the inputs are sufficiently substitutable. An economy with dominant climate sensitive sector can maintain sustained economic growth if it is capable of undertaking frontier innovations in the form of adaptation technology that increases the productivity of the inputs employed in the climate sensitive sector.
    Keywords: climate change, Climate sensitive sector, economic growth, Technological change
    JEL: O31 O32 O33 O44 Q55
    Date: 2016
  5. By: Raghavan, Mala (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: ASEAN-5’s continued economic growth with high oil and trade intensities means it is a fast growing region with a significant presence in the global energy market. This paper identifies three main drivers of oil price shocks - oil-supply, globalactivity and oil-specific demand shocks for the period 2000-2013. Subsequently, it assesses the effects of the identified oil shocks on the ASEAN-5’s macroeconomic variables and examines the responses of monetary policy. Since the recent shocks are largely demand driven, the impulse responses and historical decomposition for the ASEAN-5 highlight that the effects on inflation are accentuated while the effects on economic growth are less disruptive. The exchange rate responses are mostly positive while the effects on trade are positive for Malaysia, a net oil exporter and are moderately negative for the oil importers. Consequently the ASEAN-5’s central banks could tighten their monetary policy in response to higher inflation without fear of weakening their economies. The empirical results highlight that for monetary policy responses to be more supportive of growth, policy makers in these economies should examine the underlying causes of the future oil shocks.
    Keywords: Macroeconomics, Oil prices, Emerging Asia, Monetary Policy
    JEL: C32 E51 F32 F43 F41 E52
    Date: 2015–10–19
  6. By: Steffen Lange; Peter P\"utz; Thomas Kopp
    Abstract: Most models that try to explain economic growth indicate exponential growth paths. In recent years, however, a lively discussion has emerged considering the validity of this notion. In the empirical literature dealing with drivers of economic growth, the majority of articles is based upon an implicit assumption of exponential growth. Few scholarly articles have addressed this issue so far. In order to shed light on this issue, we estimate autoregressive integrated moving average time series models based on Gross Domestic Product Per Capita data for 18 mature economies from 1960 to 2013. We compare the adequacy of linear and exponential growth models and conduct several robustness checks. Our fndings cast doubts on the widespread belief of exponential growth and suggest a deeper discussion on alternative economic grow theories.
    Date: 2016–01
  7. By: António Afonso; João Tovar Jalles
    Abstract: Using quarterly data for 10 Euro Area countries we assess the determinants of government bond yield spreads; compute bivariate time-varying coefficient models of each determinant; and use these estimates to explain economic volatility. We find that better fiscal positions or higher than expected growth prospects reduce the yield spreads, while increases in the VIX, and bid ask, debt-to-GDP ratio or real effective exchange rate increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the Global Financial Crisis. Finally, for the case of the budget balance and real GDP growth (bid ask spread, debt-to-GDP ratio, real effect exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) is economic volatility. Key Words – volatility, fiscal policy, bond spreads, weighted least squares, time-varying coefficients
    JEL: C23 E62 G01 H62
    Date: 2016–01
  8. By: Giulia Ghiani (Politecnico di Milano); Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak (CERGE-EI Prague)
    Abstract: Using US post-war data we …find evidence of cointegration between the short term interest rate, inflation, unemployment and money supply growth. Rolling trace tests add robustness by showing lack of cointegration when money or one of the other variables are omitted. Signi…cant non-linear dynamics are found with three endogenous Markov-switching regimes, interpreted as contractions, expansions, and "unconventional" periods. We interpret the results in terms of a persistent liquidity effect with distinct dynamics over time as regimes shift across normal business cycle fluctuations and rare events.
    Keywords: Liquidity effect, money supply, inflation, cointegration, Markov-Switching VECM.
    JEL: C32 E40 E52
    Date: 2016–01

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