nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒06‒09
two papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Does economic growth really depend on the magnitude of debt? A threshold model approach By Osińska, Magdalena; Kufel, Tadeusz; Blazejowski, Marcin; Kufel, Pawel
  2. Business Cycles, Growth and Economic Policy: Schumpeter and the Great Depression By Muriel Dal-Pont Legrand; Harald Hagemann

  1. By: Osińska, Magdalena; Kufel, Tadeusz; Blazejowski, Marcin; Kufel, Pawel
    Abstract: In recent economic literature it has been emphasized that across both advanced countries and emerging markets, high levels of debt-to-gross domestic product (GDP) ratio (90% and above) are associated with notably lower growth outcomes. On the other hand, much lower levels of external debt-to-GDP ratio (60% and below) are associated with adverse outcomes for emerging market growth. These findings have been broadly cited and used in practice. On the other hand, there is an opposite evidence, such that the initial level of debt-to-GDP ratio has no impact on economic growth rate. Taking both viewpoints into account, we propose to employ a time series-based nonlinear mechanism in the threshold autoregression form in order to examine the possible relationship between economic growth rate and its potential determinants included the mentioned debt-to GDP indicator. The originality of the study is that it employs threshold variables instead of exogenous variables and time-series data instead of panel data to reveal the economic instruments that have determined the business cycle in European countries for the last 2 decades -starting from 1995. The purpose of the study is to check the mechanism of growth (measured in terms of GDP growth rate and industrial production growth rate) depending on several important macroeconomic variables, such as public debt, rate of inflation, interest rate, and rate of unemployment with the level of growth itself serving as the threshold variable. We propose an efficient methodology for seeking the best specification of threshold autoregression model in terms of both goodness of fit and parsimony of parametrization. The data (quarterly and monthly) applied in the research cover the time period from the beginning of 1995 to the end of 2013. Such a long period is interesting because it allows investigation of the mechanism of growth under two different economic policy models. We identify that the exogenous monetary mechanism played an important role in diagnosing the phases of business cycle in most European economies which is in line with liberal economic policy dominating in the observed period. The initial level of debt-to-GDP ratio as its increase within the recession period was of no value for the economic growth pattern.
    Keywords: threshold models, economic growth, public debt, economic policy, 2007—2009 recession
    JEL: C24 C87 E32
    Date: 2016
  2. By: Muriel Dal-Pont Legrand (GREDEG CNRS; Université Nice Sophia Antipolis); Harald Hagemann (University of Hohenheim, Stuttgart)
    Abstract: Joseph A. Schumpeter’s theory of economic development analyzes how growth and cycle dynamics intertwine. The process of Creative Destruction plays an essential role in that dynamics: embodying a cleaning effect, it has a clear beneficial impact on long-run development. For that reason, and also for some of his famous (and provocative) non-interventionists statements, Schumpeter is generally interpreted as a pure liquidationist. This paper contests this rather simplistic view and shows that Schumpeter not only expressed much more nuanced positions as far as practical economic issues were concerned but also that his views on economic policy were rooted in his earlier contributions before the Great Depression, attesting to a stronger time-consistency of his contributions.
    Keywords: Business cycles, growth, short run, long run, creative destruction, cleansing effect, productive recessions, economic policy, Schumpeter
    JEL: B22 B31
    Date: 2016–05

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