nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒07‒09
seven papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Financial Crisis Interventions By Josef Schroth
  2. Volatility and Growth with Recursive Preferences By Barbara Annicchiarico; Alessandra Pelloni; Fabrizio Valenti
  3. Short-run and Long-run Effects of Capital Taxation on Innovation and Economic Growth By Chen, Ping-ho; Chu, Angus C.; Chu, Hsun; Lai, Ching-Chong
  4. The long-run effect of fiscal consolidation on economic growth: Evidence from quantitative case studies By Kleis, Mischa; Moessinger, Marc-Daniel
  5. The impact of the Great Recession on the European Union countries By Jesus Ferreiro; Catalina Galvez; Carmen Gomez; Ana Gonzalez
  6. Macroeconomic regimes, technological shocks and employment dynamics By Tommaso Ferraresi; Andrea Roventini; Willi Semmler
  7. Government spending effectiveness and the quality of fiscal institutions By Garayeva, Aygun; Tahirova, Gulzar

  1. By: Josef Schroth
    Abstract: This paper develops a model of an economy where bank credit supports both productive investment and individual consumption smoothing in the face of idiosyncratic income risk. Bank credit is constrained by bank equity capital. When policy-makers inject equity capital during financial crises, they trade off stimulating credit supply immediately against long-term distortions related to funding equity injections. I calibrate my model and show that the bank equity capital injection that maximizes average utilitarian welfare redistributes from the poor to the wealthy. While wealthy savers benefit immediately from an increased supply of safe assets, less affluent borrowers and savers suffer from long-term distortions.
    Keywords: Credit and credit aggregates, Financial stability, Financial system regulation and policies, Lender of last resort
    JEL: E13 E32 E44
    Date: 2016
  2. By: Barbara Annicchiarico (DEF and CEIS, Università di Roma "Tor Vergata"); Alessandra Pelloni (DEF and CEIS, Università di Roma "Tor Vergata"); Fabrizio Valenti (DEF, Università di Roma "Tor Vergata")
    Abstract: This paper studies the relationship between volatility and long-run growth in a complete market economy with human capital accumulation and Epstein-Zin preferences. There is both crosscountry and time-series evidence that volatility is associated with lower growth. Matching this evidence has proved a challenge for growth models with no market failures as they tend to predict the opposite for values of risk aversion higher than unity. However in our model, risk aversion and intertemporal elasticity of substitution are allowed to move independently of each other, and when both are relatively high or relatively low, the relationship between volatility and growth is negative. Indeed this is the case for parametrizations of preferences in line with the literature.
    Keywords: Growth and Uncertainty; Epstein-Zin Preferences; Intertemporal Elasticity of Substitution; Risk Aversion
    JEL: D92 E22 E32 O49
    Date: 2016–06–24
  3. By: Chen, Ping-ho; Chu, Angus C.; Chu, Hsun; Lai, Ching-Chong
    Abstract: In this note, we examine the effects of capital taxation on innovation and economic growth. We find that capital taxation has drastically different effects in the short run and in the long run. An increase in the capital income tax rate has both a consumption effect and a tax-shifting effect on the equilibrium growth rates of technology and output. In the long run, the tax-shifting effect dominates the consumption effect yielding an overall positive effect of capital taxation on steady-state economic growth. However, in the short run, the consumption effect becomes the dominant force causing an initial negative effect of capital taxation on the equilibrium growth rates. These contrasting effects of capital taxation at different time horizons may provide a plausible explanation for the mixed evidence in the empirical literature on capital taxation and economic growth.
    Keywords: Capital taxation; economic growth; R&D; transition dynamics
    JEL: H2 O3 O4
    Date: 2016–05
  4. By: Kleis, Mischa; Moessinger, Marc-Daniel
    Abstract: We contribute to the literature on the long-run effect of fiscal consolidation on economic growth by applying a novel method for quantitative case studies. Relying on a qualitative (narrative) definition of fiscal consolidations based on an examination of historical policy documents and using the synthetic control method (SCM), we investigate the evolution of post-consolidation trajectories of economic growth in six case studies of OECD countries. In contrast to recent studies that reject the hypothesis of non-Keynesian effects, our results do not offer clear-cut evidence on the long-run effect of fiscal consolidation on economic growth. Half of the case studies point to a positive effect with the other half indicating a negative effect. We further do not find a specific effect of the strength of the fiscal adjustment and the type of consolidation, i.e., whether the consolidation is rather based on expenditure cuts or revenue increases.
    Keywords: economic growth,fiscal adjustment,fiscal consolidation,synthetic control method
    JEL: O40 E62 H60
    Date: 2016
  5. By: Jesus Ferreiro (Department of Applied Economics V, University of the Basque Country UPV/EHU); Catalina Galvez (Department of Applied Economics V, University of the Basque Country UPV/EHU); Carmen Gomez (Department of Applied Economics V, University of the Basque Country UPV/EHU); Ana Gonzalez (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: Although the Great Recession has been a global phenomenon affecting most developed (and emerging) economies, in the case of the European Union (EU), there are significant differences among EU individual countries and among EU groups of countries, like euro and non-euro countries regarding the depth and duration of the crisis. The paper analyses the effects of the economic and financial crisis on a set of seventeen economic and financial variables, comparing the economic performance of the EU economies before and after the onset of the crisis. The analysis confirms the hypotheses, first, of the existence of significant differences on the performance during the crisis of the EU economies, and, second, that the EU economies most affected by the crisis have been the euro countries, mainly those that join the euro after 1999. In this sense, and focusing on the Eurozone, the paper shows a rising divergence in the macroeconomic performance of euro countries, a divergence process that has been amplified during the Great Recession.
    Keywords: Great Recession, economic and financial crisis, Great Recession, European Union, Eurozone, convergence macroeconomic imbalances
    JEL: C22 O52 O57 P52
    Date: 2016–01–30
  6. By: Tommaso Ferraresi (IRPE della Toscana, Firenze University of Pisa); Andrea Roventini (Scuola Superiore Sant'Anna, OFCE Sciences PO); Willi Semmler (New school for social research New School Universisty)
    Abstract: In this work we investigate the interrelations among technology, output and employment in the different states of the U.S. economy (recessions vs. expansions). More precisely, we estimate different threshold vector autoregression (TVAR) models with TFP, hours, and GDP, employing the latter as threshold variable, and we assess the ensuing generalized impulse responses of GDP and hours as to TFP shocks. We find that positive productivity shocks, while spurring GDP growth, display a neg- ative effect on hours worked at least on impact, independently of the state of the economy. In the 1957-2011 period, the effects of productivity shocks on employment are abundantly negative in downturns, but they are not significantly different from zero in good times. However, the impact of TFP shocks in different business cycle regimes depends on the chosen sample: after the mid eighties (1984-2011), produc- tivity shocks increase hours during recessions. Finally, we express and test some conjectures that might have caused the changes in the responses in different time periods.
    Keywords: Technology shocks, employment, threshold vector autoregression, generalized impulse, response functions.
    JEL: E32 O33 C32 E63 E20
    Date: 2016–06
  7. By: Garayeva, Aygun; Tahirova, Gulzar
    Abstract: The cyclical behaviors of government spending and output are investigated for the time period 1996-2013, in the sample of 45 countries divided between 3 groups of countries – Western European, Eastern European and CIS countries – with each one of these groups representing a different development stage. Panel data fixed effects model was used for estimation purposes. In developed countries the main determinant of government spending effectiveness is found to be institutional quality, but access to financial markets is more pronounced in developing countries.
    Keywords: fiscal policy, procyclicality, institutional quality, panel data, fixed effects
    JEL: D73 E02 E32 E62
    Date: 2016–06

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