nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒02‒04
seven papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Technological Progress, Time Perception and Environmental Sustainability By Evangelos V. Dioikitopoulos; Sugata Ghosh; Eugenia Vella
  2. Going Up and Down: Rethinking the Empirics of Growth in the Developing and Newly Industrialized World By Francesco Lamperti; Clara Elisabetta Mattei
  3. Tracking the Slowdown in Long-Run GDP Growth By Juan Antolin-Diaz; Thomas Drechsel; Ivan Petrella
  4. Islamic Banking, Credit and Economic Growth: Some Empirical Evidence By Guglielmo Maria Caporale; Mohamad Husam Helmi
  5. Taming macroeconomic instability: Monetary and macro prudential policy interactions in an agent-based model By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  6. Fiscal Austerity during Debt Crises By Arellano, Cristina; Bai, Yan
  7. Veiled Repression: Mainstream Economics, Capital Theory, and the Distributions of Income and Wealth By Lance Taylor

  1. By: Evangelos V. Dioikitopoulos (Department of Management, King's College London); Sugata Ghosh (Department of Economics amd Finanace, Brunel University London); Eugenia Vella (Department of Economics, University of Sheffield)
    Abstract: This paper explores the relationship among technological progress, environment and growth by combining endogenous efficiency of public abatement with endogenous discounting. Our model can feature two different balanced growth paths corresponding to different levels of environmental quality, which remains constant in the long-run although the economy grows. The multiple equilibria point to a non-monotonic relationship among technological progress, growth and the environment, as observed in the data. A Ramsey planner can implement the good equilibrium; however, under a positive technology shock, the economy achieves higher long-run growth at the cost of lower environmental quality (even if agents value the environment highly). This finding could help us explain why some advanced economies may not succeed in cleaning the environment effectively.
    Keywords: Time preference; growth; environmental quality; Fiscal policy; technological progress
    JEL: D90 E21 E62 H31 O44 Q28
    Date: 2016
  2. By: Francesco Lamperti; Clara Elisabetta Mattei
    Abstract: Growth dynamics are remarkably heterogeneous, in particular when one focuses on developing countries. Economic miracles and failures are embedded within extended phases of either growth or decline. We propose a methodology and a taxonomy that will characterize countries' growth patterns on the basis of the sequence of regimes they experience. In particular, we emphasize the difference between expansionary and recessionary regimes and, after classifying the growth pattern of all 123 developing countries in our dataset, we explore cross-sectional empirical regularities which emerge during upward and downward growth phases. Results show that expansionary regimes are associated with convergence and positive correlation between growth and (short run) volatility. On the contrary, in recessionary regimes, poorer countries face deeper failures and a negative correlation between growth and volatility is found, signifying that output fluctuates less around the trend during strong rather than mild recessions. Finally, we discover that regimes of growth and recession show similar average length (about 16 years). Although recessions on average are remarkably pronounced (14% loss), during expansions the magnitude of growth is much larger.
    Keywords: growth, structural breaks, expansionary and recessionary regimes, convergence
    Date: 2016–01–13
  3. By: Juan Antolin-Diaz (Department of Macroeconomic Research, Fulcrum Asset Management); Thomas Drechsel (Centre for Macroeconomics (CFM); Economics Department London School of Economics (LSE)); Ivan Petrella (Bank of England; Department of Economics, Mathematics and Statistics Birkbeck College; Centre for Economic Policy Research (CEPR))
    Abstract: Using a dynamic factor model that allows for changes in both the long-run growth rate of output and the volatility of business cycles, we document a significant decline in long-run output growth in the United States. Our evidence supports the view that most of this slowdown occurred prior to the Great Recession. We show how to use the model to decompose changes in long-run growth into its underlying drivers. At low frequencies, a decline in the growth rate of labor productivity appears to be behind the recent slowdown in GDP growth for both the US and other advanced economies. When applied to real-time data, the proposed model is capable of detecting shifts in long-run growth in a timely and reliable manner.
    Keywords: Long-run growth, Business cycles, Productivity, Dynamic factor models, Real-time data
    JEL: C32 E01 E23 E32 O47
    Date: 2014–10
  4. By: Guglielmo Maria Caporale; Mohamad Husam Helmi
    Abstract: This paper examines the effects of Islamic banking on the causal linkages between credit and GDP by comparing two sets of seven emerging countries, the first without Islamic banks, and the second with a dual banking system including bothIslamic and conventional banks. Unlike previous studies, it checks the robustness of the results by applying both time series and panel methods; moreover, it tests for both long- and short-run causality. In brief, the findings highlight significant differences between the two sets of countries reflecting the distinctive features of Islamic banks. Specifically, the time series analysis provides evidence of long-run causality running from credit to GDP in countries with Islamic banks only. This is confirmed by the panel causality tests, although in this case short-run causality in countries without Islamic banks is also found.
    Keywords: Credit, growth, Islamic banking, causality tests
    JEL: C32 C33 G21 O11
    Date: 2016
  5. By: Lilit Popoyan (Laboratory of Economics and Management (Pisa) (LEM)); Mauro Napoletano (OFCE); Andrea Roventini (Department of economics)
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macro prudential regulations and their possible interactions with different 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 dfferent levers of Basel III andtheir 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 inclusionof an additional lever does not always improve the performance of the macro prudentialregulation
    Keywords: Macro prudential policy; Basel III regulation; Financial stability; Monetary policy; Agent-based computational economics
    JEL: C63 E52 E6 G1 G21 G28
    Date: 2015–12
  6. By: Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester)
    Abstract: This paper constructs a dynamic model in which fiscal restrictions interact with government borrowing and default. The government faces fiscal constraints; it cannot adjust tax rates or impose lump-sum taxes on the private sector, but it can adjust public consumption and foreign debt. When foreign debt is sufficiently high, however, the government can choose to default to increase domestic public and private consumption by freeing up the resources used to pay the debt. Two types of defaults arise in this environment: fiscal defaults and aggregate defaults. Fiscal defaults occur because of the government's inability to raise tax revenues. Aggregate defaults occur even if the government could raise tax revenues; debt is simply too high to be sustainable. In a quantitative exercise calibrated to Greece, we find that our model can predict the recent default, but that increasing taxes would not have prevented it. In fact, increasing taxes would have made the recession deeper because of the distortionary effects of taxation.
    Keywords: Sovereign default; Tax reforms; Debt crisis
    JEL: F30
    Date: 2016–01–26
  7. By: Lance Taylor (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: The Cambridge UK vs USA capital theory debates of the 1960s showed that the workhorse mainstream growth model relies on unsustainable assumptions. Its standard interpretation is not consistent with the last four decades of data. Part of an estimated increase in the ratio of personal wealth to income in recent years is due to higher asset prices. The other side of the accounts reveals that financialization and growing business debt partially offset the greater net worth of households. Attempts to interpret growth in wealth principally as a consequence of capitalization of rents are misleading. An alternative growth model based on Cambridge ideas can help correct these misinterpretations.
    Keywords: Income distribution, wealth distribution, Cambridge controversies
    JEL: D3 E1
    Date: 2015–12

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