nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒11‒27
eight papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Macroeconomics with endogenous markups and optimal taxation By Federico Etro
  2. Population Growth, Human Capital Accumulation, and the Long-Run Dynamics of Economic Growth By Kaixing Huang
  3. Project Heterogeneity and Growth: The Impact of Financial Selection on Firm Entry By Felipe Saffie; Sina Ates
  4. Financial Depth and the Asymmetric Impact of Monetary Policy By Caglayan, Mustafa; Kandemir Kocaaslan, Ozge; Mouratidis, Kostas
  5. Enterprise credit, household credit and growth: New evidence from 126 countries By Florian Léon
  6. Factor Income Distribution and Endogenous Economic Growth - When Piketty meets Romer - By Andreas Irmen; Amer Tabakovic
  7. The Belarus Economy: The Challenges of Stalled Reforms By Amat Adarov; Kateryna Bornukova; Rumen Dobrinsky; Peter Havlik; Gabor Hunya; Dzmitry Kruk; Olga Pindyuk
  8. Signaling Effects of Monetary Policy By Melosi, Leonardo

  1. By: Federico Etro (Ca Foscari University of Venice, Department of Economics)
    Abstract: The neoclassical macroeconomic framework is extended to general preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle, market inefficiencies and optimal corrective taxation. When markups are endogenously countercyclical the impact of shocks on consumption and labor supply is magnified through new intertemporal substitution mechanisms, and the optimal fiscal policy requires a countercyclical labor income subsidy and a capital income tax that is positive along the growth path and converging to zero in the long run. With an endogenous number of goods and strategic interactions, entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize the equilibrium dynamics and derive explicit tax rules for a variety of intratemporal preference aggregators including the quadratic, directly additive, indirectly additive and homothetic classes.
    Keywords: Monopolistic competition, variable markups, optimal taxation, business cycles
    JEL: E1 E2 E3
    Date: 2016
  2. By: Kaixing Huang (School of Economics & the Centre for Global Food and Resources, University of Adelaide)
    Abstract: This article adopts a modified idea-based growth model with endogenous human capital and population to explain why the theoretically relevant growth effect of population growth on economic growth is empirically unobservable. The model predicts that the economic growth rate is proportional to the growth rates of both population and human capital. The offsetting movement of the growth rates of population and human capital after the demographic transition obscures observation of the growth effect. The model also generates an evolution of the growth rates of population, human capital, and per capita income that is consistent with historical and postwar data.
    Keywords: Economic growth, ideas, human capital, population
    JEL: E27 O40
    Date: 2016–11
  3. By: Felipe Saffie (University of Maryland); Sina Ates (Federal Reserve Board)
    Abstract: In the classical literature of innovation-based endogenous growth, the engine of long-run economic growth is firm entry. Nevertheless, when projects are heterogeneous, and good ideas are scarce, a mass-composition trade-off emerges in this link: larger cohorts have lower average quality. As one of the roles of the financial system is to screen the quality of projects, the ability of financial intermediaries to detect promising projects shapes the strength of this trade-off. We build a general equilibrium endogenous growth model with project heterogeneity and financial screening to study this relationship. We use two quantitative experiments to illustrate the relevance of our analytic results. First, we show that accounting for heterogeneity and selection allows the model to conciliate two well-known and apparently contradictory effects of corporate taxation. Corporate taxation has a strong detrimental effect on firm entry while affecting the long-run growth only mildly. A second illustration studies the effects of financial development on growth. This experiment shows that size-based measures of financial development (e.g. domestic credit over GDP) are not good proxies for the ability of the financial system to select the most promising projects. Finally, we propose a novel firm-level measure to assess the accuracy of financial selection across countries.
    Date: 2016
  4. By: Caglayan, Mustafa; Kandemir Kocaaslan, Ozge; Mouratidis, Kostas
    Abstract: This paper investigates the importance of financial depth in evaluating the asymmetric impact of monetary policy on real output over the course of the US business cycle. We show that monetary policy has a significant impact on output growth during recessions. We also show that financial deepening plays an important role by dampening the effects of monetary policy shocks in recessions. The results are robust to the use of alternative financial depth and monetary policy shock measures as well as to two different sample periods.
    Keywords: Financial depth; financial frictions; monetary policy; output growth; asymmetric effects; Markov switching; instrumental variable
    JEL: E32 E52
    Date: 2016–08–01
  5. By: Florian Léon (CREA, Université du Luxembourg)
    Abstract: This paper attempts to distinguish the effects of household and enterprise credit on Economic growth. To do so, I create a new, hand-collected database covering 143 countries over the period 1995-2014 (126 countries are employed for econometric analysis). Estimation results confirm recent evidence documenting the absence of the effect of total credit to growth. Findings also show that household credit has a negative effect on growth, but I fail to provide robust support for a positive effect of business credit.
    Keywords: Financial development, Household credit, Enterprise credit, Economic growth
    JEL: E44 G21 O16
    Date: 2016
  6. By: Andreas Irmen (CREA, Université du Luxembourg); Amer Tabakovic (CREA, Université du Luxembourg)
    Abstract: We scrutinize Thomas Piketty’s (2014) theory concerning the relationship between an economy’s long-run growth rate, its capital-income ratio, and its factor income distribution put forth in his recent book Capital in the Twenty-First Century. We find that a smaller long-run growth rate may be associated with a smaller capital-income ratio. Hence, the key implication of Piketty’s Second Fundamental Law of Capitalism does not hold. In line with Piketty’s theory a smaller long-run growth rate may go together with a greater capital share. However, the mechanics behind this result are the opposite of what Piketty suggests. Our findings obtain in variants of Romer’s (1990) seminal model of endogenous technological change. Here, both the economy’s savings rate and its growth rate are endogenous variables whereas in Piketty’s theory they are both exogenous parameters. Including demographic growth in the spirit of Jones (1995) shows that a smaller growth rate of the economy may imply a lower capital share contradicting a central claim in Piketty’s book.
    Keywords: Endogenous Technological Change, Capital Accumulation, Aggregate Factor Income Distribution
    JEL: E10 E21 E25 O33 O41
    Date: 2016
  7. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw); Kateryna Bornukova; Rumen Dobrinsky (The Vienna Institute for International Economic Studies, wiiw); Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Gabor Hunya (The Vienna Institute for International Economic Studies, wiiw); Dzmitry Kruk; Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Twenty-five years after the dissolution of the Soviet Union, Belarus stands out as a special case in transition blending, on the one hand, signs of relative prosperity, socially oriented policies and sprouts of entrepreneurships and, on the other hand, remnants of the communist past. The core of the Belarusian economic model throughout most of this period was a combination of external rents and soft budget constraints on the state-owned part of the economy backed by a strong system of administrative control. In periods of favourable external conditions this mix provided for relatively high rates of economic growth and allowed the authorities to maintain a ‘social contract’ with the population targeting close to full employment. But this model also led to the persistent accumulation of a quasi-fiscal deficit which time and again came to the surface, and its subsequent monetisation provoked macroeconomic and currency turmoil. At present, Belarus’ economic model has run up against its limits and policy changes seem inevitable.
    Keywords: Belarus, economic transformation, macroeconomic policy, soft budget constraints, currency crisis
    JEL: E65 O52 P30 P52
    Date: 2016–11
  8. By: Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: We develop a dynamic general equilibrium model in which the policy rate signals the central bank’s view about macroeconomic developments to price setters. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. This model improves upon existing perfect information models in explaining why, in the data, inflation expectations respond with delays to monetary impulses and remain disanchored for years. In the 1970s, U.S. monetary policy is found to signal persistent inflationary shocks, explaining why inflation and inflation expectations were so persistently heightened. The signaling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s.
    Keywords: Disanchoring of inflation expectations; heterogeneous beliefs; endogenous signals; Bayesian VAR; Bayesian counterfactual analysis; Delphic effects of monetary policy
    JEL: C11 C52 D83 E52
    Date: 2016–09–16

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