nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒05‒28
four papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. On Monetary Policy, Unemployment, and Economic Growth By Rosas-Martinez, Victor H.
  2. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By De Marco, Filippo; Wieladek, Tomasz
  3. The Japanese macroeconomic mystery By W Max Corden; Sisira Jayasuriya
  4. Weaknesses of 'wage-led growth' By Skott, Peter

  1. By: Rosas-Martinez, Victor H.
    Abstract: Recognizing the possible relation between investments, economic growth and unemployment, and how there is not an established impact of an unlikely productive project failure on the secondly mentioned variables, we address such relation and asses theoretically the effect of different instruments of monetary policy on the mentioned macroeconomic indicators. To do this we modify two models of economic growth by considering the role of entrepreneurs, risk takers, and a monetary authority which is the average agent of the economy that is assumed to be aware of how the inflation can damage equally the individuals' life style, independently of their particular levels of income, finding that the impact of the monetary instruments depends on the behavior of the population.
    Keywords: Monetary Authority; Endogenous expansive policy; Inflation; Unemployment; Economic Growth
    JEL: E2 E5 O3 O4
    Date: 2016–01–19
  2. By: De Marco, Filippo; Wieladek, Tomasz
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs' asset growth contracts by 6.9% in the first year of a new bank-firm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements; Firm-level real effects; prudential and monetary policy.; relationship lending; SMEs
    JEL: E51 G21 G28
    Date: 2016–05
  3. By: W Max Corden; Sisira Jayasuriya
    Abstract: This paper examines Japan’s two decades of so-called ‘stagnation’ since the rapid the collapse of the bubble economy in the early 1990s brought the long period of rapid post-war economic growth to an abrupt halt. Successive governments have experimented with varying policy measures to restore growth without much success, though Keynesian fiscal measures have helped avoid high unemployment. A series of policy mistakes and demographic shifts that foreshadowed an aging and shrinking population led to a loss of confidence in the country’s long term economic prospects and hampered recovery. A major cause of continuing stagnation has been a sharp decline in private corporate investment to the point where it became a net saver. Surprising for a country with no regulatory barriers to cross border capital mobility, the bulk of Japanese savings have gone into government bonds yielding progressively lower returns despite better foreign options. This extreme ‘home bias’ has enabled governments to run debt financed fiscal deficits for a long period but now public debt has exploded to well over twice GDP, threatening fiscal sustainability. Direct government measures to channel investments overseas through a Sovereign Wealth Fund can not only boost Japan’s longer term income but also provide an immediate stimulus by depreciating its exchange rate. A fundamental lesson from the Japanese experience is that, to avoid a public debt sustainability problem, long term fiscal stimulus measures should make productive investments that enable subsequent debt repayments.
    Keywords: fiscal sustainability, bond market crisis, home bias, sovereign wealth fund
    JEL: E12 E21 E62
    Date: 2016
  4. By: Skott, Peter (Department of Economics, University of Massachusetts, Amherst)
    Abstract: The emphasis in post-Keynesian macroeconomics on wage-versus profit-led growth may not have been helpful. The profit share is not an exogenous variable, and the correlations between the profit share and economic growth can be positive for some exogenous shocks but negative for others. The terminology, second, suggests a unidirectional causality from distribution to aggregate demand while in fact distribution can itself be directly affected by shifts in aggregate demand. The reduced form correlations,third, depend on interactions with the labor market, and a focus on the goods market can be misleading. If, fourth, empirical estimates are taken at face value, the support for wage-led conclusions is much weaker than suggested by the literature. A focus on the growth-benefits of a reduction in inequality, finally, makes for an impoverished policy discussion.
    Keywords: investment, saving, income distribution, Lucas critique, Marglin-Bhaduri model
    JEL: E2 O41
    Date: 2016

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