nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒02‒29
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. A semi-endogenous growth model for developing countries with public factors, imported capital goods, and limited export demand By Hallonsten, Jan Simon; Ziesemer, Thomas
  2. The dynamics of business investment following banking crises and normal recessions By Jannsen, Nils
  3. Optimal Growth and Debt Dynamics under GDP-Based Collaterals By Daria Onori
  4. Labour reallocation and productivity dynamics: financial causes, real consequences By Claudio Borio; Enisse Kharroubi; Christian Upper; Fabrizio Zampolli
  5. The tale of two great crises By Fratianni, Michele; Giri, Federico
  6. Potential Output and Recessions: Are We Fooling Ourselves? By Martin, Robert; Munyan, Tenyanna; Wilson, Beth Anne

  1. By: Hallonsten, Jan Simon (University of Uppsala); Ziesemer, Thomas (UNU-MERIT, Maastricht University)
    Abstract: We add non-rivalrous public factors, imported capital goods and an export demand function to a human-capital augmented growth model with individuals differing in their abilities to form human capital. The result is a semi-endogenous growth model for developing countries with no machinery sector and no R&D. Higher exports lead to more private investment, higher terms of trade and more growth and allow for higher investment in public capital. An increase in public investment increases human capital and output, raises demand for imported capital goods and exports. A good balance for public and private investment has to be found in order to justify taxation and avoid terms of trade losses. Our analysis of a vector-error-correction model for Trinidad &Tobago shows that additional expenditure for public investment increases output less than taxes decrease per capita consumption and therefore is sub-optimal there. Both, temporary and permanent shocks on public investment have level effects supporting semi-endogenous growth modelling. Permanent shocks on the growth rate of world income and oil prices increase exports, private and public capital, education and consumption, and demonstrate that the VECM effects are in line with the logic of the theoretical model.
    Keywords: Growth, open economy, public investment, education
    JEL: F43 H54 I25 O41 O54
    Date: 2016–01–15
  2. By: Jannsen, Nils
    Abstract: I empirically analyze the dynamics of business investment following normal recessions (declines in business investment that are not associated with banking crises) and banking crises. Using a panel of 16 advanced economies, I find evidence for significant non-linear trend reversion or bounce-back effects on the level of business investment following normal recessions, i.e., the deeper the previous recession was, the higher the growth rate of business investment will be. The trend reversion effect is absent when a decline in business investment is associated with a banking crisis. As a consequence, normal recessions do not have significant permanent effects on the level of business investment, whereas banking crises have large and significant permanent effects. The results are in line with important theories and other empirical results on business cycle dynamics.
    Keywords: business investment,business cycle,recovery,banking crises,asymmetries
    JEL: E32 C33
    Date: 2015
  3. By: Daria Onori (LEO - Laboratoire d'Economie d'Orléans - CNRS - Université d'Orléans)
    Abstract: This paper analyzes the consequences of external debt collaterals on the optimal growth path of a country. To this end we develop a small open economy model of endogenous growth where public spending can be financed by borrowing on imperfect international financial markets, where the country's borrowing capacity is limited. In contrast to the existing literature, which assumes that debt is constrained by the stock of capital, we investigate the consequences and policy implications of GDP-based collaterals. First, we show that the economy may converge in a finite time to the regime with binding collateral constraint. Second, in such regime the steady state public expenditures-to-GDP ratio is greater than that of the existing literature's models. Finally, if the economy is not sufficiently developed, in financial and economic terms, the country will stay in autarky forever.
    Keywords: open economy, two-stage growth, external debt, GDP-based collaterals, imperfect nancial markets, multi-stage optimal control.
    Date: 2015
  4. By: Claudio Borio; Enisse Kharroubi; Christian Upper; Fabrizio Zampolli
    Abstract: We investigate the link between credit booms, productivity growth, labour reallocations and financial crises in a sample of over twenty advanced economies and over forty years. We produce two key findings. First, credit booms tend to undermine productivity growth by inducing labour reallocations towards lower productivity growth sectors. A temporarily bloated construction sector stands out as an example. Second, the impact of reallocations that occur during a boom, and during economic expansions more generally, is much larger if a crisis follows. In other words, when economic conditions become more hostile, misallocations beget misallocations. These findings have broader implications: they shed light on the recent secular stagnation debate; they provide an alternative interpretation of hysteresis effects; they highlight the need to incorporate credit developments in the measurement of potential output; and they provide a new perspective on the medium- to long-run impact of monetary policy as well as its ability to fight post-crisis recessions.
    Keywords: Labour reallocation, productivity, credit booms, financial crises, hysteresis
    Date: 2016–01
  5. By: Fratianni, Michele; Giri, Federico
    Abstract: The great depression of 1929 and the great financial crisis of 2008 have been the two big events of the last 75 years. Not only have they produced serious economic consequences but they also changed our view of economics and policymaking. The aim of this work is to compare these two great crises and highlight similarities as well as differences. Monetary policy, the exchange rate system and the role of the banks are our fields of investigation. Our findings are that two big events have more similarities than dissimilarities.
    Keywords: Great Depression,Great Financial Crisis,gold standard,Eurozone,money multiplier,shadow banking
    JEL: E5 E31 E42 G21
    Date: 2015
  6. By: Martin, Robert (Barclays Investment Bank); Munyan, Tenyanna (Vanderbilt University); Wilson, Beth Anne (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper studies the impact of recessions on the longer-run level of output using data on 23 advanced economies over the past 40 years. We find that severe recessions have a sustained and sizable negative impact on the level of output. This sustained decline in output raises questions about the underlying properties of output and how we model trend output or potential around recessions. We find little support for the view that output rises faster than trend immediately following recessions to close the output gap. Indeed, we find little evidence that growth is faster following recessions than before; if anything post-trough growth is slower. Instead, we find that output gaps close importantly through downward revisions to potential output rather than through rapid post-recession growth. The revisions are made slowly (over years)--a process that leads to an initial underestimation of the effect of recessions on potential output and a corresponding under-prediction of inflation.
    Keywords: business fluctuations; cycles; general macro; international business cycles
    JEL: E20 E32 F44
    Date: 2015–09–11

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