nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒10‒02
five papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Institutions, public debt and growth in Europe By Masuch, Klaus; Moshammer, Edmund; Pierluigi, Beatrice
  2. New trajectories of the Hungarian regional development: balanced and rush growth of territorial capital By Jóna, György
  3. China Pro-Growth Monetary Policy and Its Asymmetric Transmission By Chen, Kaiji; Waggoner, Daniel F.; Higgins, Patrick C.; Zha, Tao
  4. Endogenous Labor Share Cycles: Theory and Evidence By Jakub Growiec; Peter McAdam; Jakub Muck
  5. An inflation-predicting measure of the output gap in the euro area By Jarociński, Marek; Lenza, Michele

  1. By: Masuch, Klaus; Moshammer, Edmund; Pierluigi, Beatrice
    Abstract: This paper shows that initial cross-country institutional differences can explain to a substantial extent the relative GDP performance of European countries since 1995, after controlling for the initial level of GDP per capita and government debt. It shows that improving the quality of institutions could lead to significantly higher per capita GDP. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor subsequent real growth performance during this period. Interestingly, the detrimental effect of high debt levels seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The results are confirmed across a large sample of countries, also including OECD countries outside Europe. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular. JEL Classification: O43, C23, E02, H63
    Keywords: panel estimates, public debt, public governance, quality of institutions and real growth, structural reforms
    Date: 2016–09
  2. By: Jóna, György
    Abstract: The basic assumption of the paper is that numerous similarities exist between the patterns of economic growth and territorial capital growth. The rush economic growth and rush growth of territorial capital are compared empirically at Hungarian micro-regional level from 2004 until 2010. After normalizing the dataset, a very novel spatial econometric method is applied, called a penalty for bottleneck. The results show that the constant rush growth of territorial capital is as harmful as economic recession. On the other hand, the decrease of infrastructural and social capital caused the rush growth of territorial capital in this period. Moreover, the key findings of two case studies suggest that the balanced growth of territorial capital will be created by the falling social inequalities and increasing infrastructural capital.
    Keywords: territorial capital, rush growth, balanced development, endogenous assets
    JEL: R00 R10 R11 R12 R13
    Date: 2015–06
  3. By: Chen, Kaiji (Emory University); Waggoner, Daniel F. (Federal Reserve Bank of Atlanta); Higgins, Patrick C. (Federal Reserve Bank of Atlanta); Zha, Tao (Federal Reserve Bank of Atlanta)
    Abstract: China monetary policy, as well as its transmission, is yet to be understood by researchers and policymakers. In the spirit of Taylor (1993, 2000), we develop a tractable framework that approximates practical monetary policy of China. The framework, grounded in relevant institutional elements, allows us to quantify the policy effects on output and prices. We find strong evidence that monetary policy is designed to support real GDP growth mandated by the central government while resisting inflation pressures and that contributions of monetary policy shocks to the GDP fluctuation are asymmetric across different states of the economy. These findings highlight the role of M2 growth as a primary instrument and the bank lending channel to investment as a key transmission mechanism for monetary policy. Our analysis sheds light on institutional constraints on a gradual transition from M2 growth to the nominal policy interest rate as a primary instrument for monetary policy.
    Keywords: monetary transmission; endogenous switching; central government; institutional rigidities; GDP growth target; lower growth bound; nonlinear VAR; systematic monetary policy; policy shocks; heavy industries; investment; bank loans; lending channel
    JEL: C13 C3 E02 E5
    Date: 2016–09–01
  4. By: Jakub Growiec; Peter McAdam; Jakub Muck
    Abstract: Based on long US time series we document a range of empirical properties of the labor's share of GDP. We identify its substantial medium-to-long run, pro-cylical swings and show that most of its variance lies beyond business-cycle frequencies. We explore the extent to which these empirical regularities can be explained by a calibrated micro-founded, nonlinear growth model with normalized CES technology and endogenous labor- and capital augmenting technical change driven by purposeful directed R&D investments. We demonstrate that dynamic macroeconomic trade-offs created by arrivals of both types of new technologies can lead to prolonged swings in the labor share (and other model variables) due to oscillatory convergence to the balanced growth path as well as emergence of limit cycles via Hopf bifurcations. Both predictions are consistent with the empirical evidence.
    Keywords: Labor income share, Endogenous cycles, Factor-augmenting endogenous technical change, R&D, CES, Normalization.
    JEL: E25 E32 O33 O41
    Date: 2016–09
  5. By: Jarociński, Marek; Lenza, Michele
    Abstract: Using a small Bayesian dynamic factor model of the euro area we estimate the deviations of output from its trend that are consistent with the behavior of inflation. We label these deviations the output gap. In order to pin-down the features of the model, we evaluate the accuracy of real-time inflation forecasts from different model specifications. The version that forecasts inflation best implies that after the 2011 sovereign debt crisis the output gap in the euro area has been much larger than the official estimates. Versions featuring a secular-stagnation-like slowdown in trend growth, and hence a small output gap after 2011, do not adequately capture the inflation developments. JEL Classification: C32, C53, E31, E32, E37
    Keywords: factor model, inflation forecast, output gap, Phillips curve
    Date: 2016–09

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