nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒10‒30
five papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Did Fiscal Consolidation Cause the Double-Dip Recession in the Euro Area? By Philipp Heimberger
  2. Oil price and economic growth: a long story? By María Dolores Gadea; Ana Gómez-Loscos; Antonio Montañés
  3. Financial shocks and inflation dynamics By Abbate, Angela; Eickmeier, Sandra; Prieto, Esteban
  4. Monopoly Rights and Economic Growth: An Inverted U-Shaped Relation By Kenichi Ueda; Stijn Claessen
  5. The Big Push and Economic Growth: Empirical Evidence By Juan David García

  1. By: Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Abstract This paper analyses the short-run effects of fiscal consolidation measures on economic activity in the euro area during the euro crisis. It presents new econometric estimates on the link between cumulative GDP growth and fiscal austerity measures during 2011-2013. The main empirical finding is that the depth of the economic crisis in the euro area's economies is closely related to the harshness of fiscal austerity. Cumulative multiplier estimates are found to vary in a range from 1.4 to 2.1, depending on the data source used to identify the intensity of fiscal consolidation. Given these multiplier values, a reasonable approximation of the size of the output losses due to fiscal austerity in the euro area during 2011-2013 is in the range of 5.5% to 8.4% of GDP. Against the background of the prevailing macroeconomic and institutional circumstances, fiscal consolidation is argued to be the cause of the double-dip recession.
    Keywords: fiscal policy, fiscal multiplier, fiscal consolidation, austerity, growth, eurozone
    JEL: E61 E62 E63
    Date: 2016–10
  2. By: María Dolores Gadea (UNIVERSITY OF ZARAGOZA); Ana Gómez-Loscos (Banco de España); Antonio Montañés (UNIVERSITY OF ZARAGOZA)
    Abstract: This study investigates changes in the relationship between oil prices and the US economy from a long-term perspective. Although neither of the two series (oil price and GDP growth rates) presents structural breaks in mean, we identify different volatility periods in both of them, separately. From a multivariate perspective, we do not observe a significant effect between changes in oil prices and GDP growth when considering the full period. However, we find a significant relationship in some subperiods by carrying out a rolling analysis and by investigating the presence of structural breaks in the multivariate framework. Finally, we obtain evidence, by means of a time-varying VAR, that the impact of the oil price shock on GDP growth has declined over time. We also observe that the negative effect is greater at the time of large oil price increases, supporting previous evidence of nonlinearity in the relationship.
    Keywords: oil price, business cycle, structural breaks
    JEL: C22 C32 E32 Q43
    Date: 2016–10
  3. By: Abbate, Angela; Eickmeier, Sandra; Prieto, Esteban
    Abstract: We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the "missing disinflation" during the Great Recession. We apply a vector autoregressive model to US data and identify financial shocks through sign restrictions. Our main finding is that expansionary financial shocks temporarily lower inflation. This result withstands a large battery of robustness checks. Moreover, negative financial shocks helped preventing a deflation during the latest financial crisis. We then explore the transmission channels of financial shocks relevant for inflation, and find that the cost channel can explain the inflation response. A policy implication is that financial shocks that move output and inflation in opposite directions may worsen the trade-off for a central bank with a dual mandate.
    Keywords: financial shocks,inflation dynamics,monetary policy,financial frictions,cost channel,sign restrictions
    JEL: E31 E44 E58
    Date: 2016
  4. By: Kenichi Ueda (The University of Tokyo); Stijn Claessen (Federal Reserve Board)
    Abstract: Supported by most theories, employment protection often is found to reduce economic growth. Almost all existing empirical studies, however, are based on data from continental Europe and Japan, where labor protection is generous. Using data for the United States, where labor protection is minimal, we find, by contrast, positive effects but only in knowledge-intensive industries. To reconcile these facts, we propose a simple theoretical model based on a hold-up problem arising from firm-specific investment. This makes some job security efficient and the relationship between job security and growth an inverted U-shaped, i.e., basic labor protection increases growth, but generous protection reduces it. Importantly, we show that a firm faces a time inconsistency problem so that its promise of job security is not credible. Thus, legal restrictions become valuable if they are well designed. Since job security is even less for financially distressed firms, interactions also arise between financial and labor laws, as powerful banks can demand more layoffs. Using U.S. state-industry data, we confirm these effects of bank competition and employment protection, as well as their interactions.
    Date: 2016–10
  5. By: Juan David García
    Abstract: Since the introduction in the 1940s of the "big push" as a concept and a conceptual frame, it has served to explain the divergent processes of economic growth and development of different countries. This article attempts to link the advance in the theory of the big push made by (Murphy, Shleifer and Vishny, 1988), with other studies that empirically confirm this development. The results show that the mathematical development made by (Murphy et al., 1988) can be supported empirically, which means that in fact the actual inter-sectoral dependence, under certain conditions, helps to build virtuous circles contributing to economic growth and development.
    Keywords: Big Push, empirical evidence, economic growth, economic development
    JEL: O40 E10 N10
    Date: 2016–10–20

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