nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒01‒01
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Inequality, Financial Development and Economic Growth in the OECD, 1870-2011 By Jakob Brochner Madsen; MD. Rabiul Islam; Hristos Doucouliagos
  2. Financial vulnerability and monetary policy By Adrian, Tobias; Duarte, Fernando M.
  3. Endogenous wage rigidities, human capital accumulation and growth By Ahmed Tritah
  4. Words are the new numbers: A newsy coincident index of business cycles By Leif Anders Thorsrud
  5. Business Cycles, Investment Shocks, and the "Barro-King Curse" By Guido Ascari; Louis Phaneuf
  6. Monetary Policy, Private Debt and Financial Stability Risks By Gregory Bauer; Eleonora Granziera

  1. By: Jakob Brochner Madsen; MD. Rabiul Islam; Hristos Doucouliagos
    Abstract: Inequality's effect on growth remains elusive, largely due to endogeneity, complex interactions, and lead-lag relationships. We revisit this issue by examining the four main channels through which inequality transmits to growth: savings, investment, education, and knowledge production. We construct new panel data for 21 OECD countries spanning 142 years. External communist influence is used as a new time-varying instrument for inequality and the effects of inequality on the outcome variables are made conditional on the stage of financial development. Our results show that inequality hampers growth at low to moderate levels of financial development but promotes growth at advanced levels.
    Keywords: inequality, financial development, transmission channels
    JEL: E20 O15 O40
    Date: 2016–11
  2. By: Adrian, Tobias (Federal Reserve Bank of New York); Duarte, Fernando M. (Federal Reserve Bank of New York)
    Abstract: We present a parsimonious New Keynesian model that features financial vulnerabilities. The vulnerabilities generate time varying downside risk of GDP growth by driving the dynamics of risk premia. Monetary policy impacts the output gap directly via the IS curve, and indirectly via its impact on financial vulnerabilities. The optimal monetary policy rule always depends on financial vulnerabilities in addition to output, inflation, and the real rate. We show that a classic Taylor rule exacerbates downside risk of GDP growth relative to an optimal Taylor rule, thus generating welfare losses associated with negative skewness of GDP growth.
    Keywords: monetary policy; macro-finance; financial stability
    JEL: E52 G10 G12
    Date: 2016–12–01
  3. By: Ahmed Tritah
    Date: 2016
  4. By: Leif Anders Thorsrud (Norges Bank (Central Bank of Norway))
    Abstract: I construct a daily business cycle index based on quarterly GDP and textual information contained in a daily business newspaper. The newspaper data are decomposed into time series representing newspaper topics using a Latent Dirichlet Allocation model. The business cycle index is estimated using the newspaper topics and a time-varying Dynamic Factor Model where dynamic sparsity is enforced upon the factor loadings using a latent threshold mechanism. The resulting index is shown to be not only more timely but also more accurate than commonly used alternative business cycle indicators. Moreover, the derived index provides the index user with broad based high frequent information about the type of news that drive or reflect economic fluctuations.
    Keywords: Business cycles, Dynamic Factor Model, Latent Dirichlet Allocation (LDA)
    JEL: C11 C32 E32
    Date: 2016–12–21
  5. By: Guido Ascari; Louis Phaneuf
    Abstract: Recent empirical evidence identfi es investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profi les of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary eff ect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model - namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specifi c technologies - can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the eff ects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.
    Keywords: Investment shocks, Business cycle comovements, Standard household preferences, Monopolistic competition, Wage and price contracting, Intermediate inputs, Trend output growth, Trend inflation
    JEL: E31 E32
    Date: 2016–12–14
  6. By: Gregory Bauer; Eleonora Granziera
    Abstract: Can monetary policy be used to promote financial stability? We answer this question by estimating the impact of a monetary policy shock on private-sector leverage and the likelihood of a financial crisis. Impulse responses obtained from a panel VAR model of 18 advanced countries suggest that the debt-to-GDP ratio rises in the short run following an unexpected tightening in monetary policy. As a consequence, the likelihood of a financial crisis increases, as estimated from a panel logit regression. However, in the long run, output recovers and higher borrowing costs discourage new lending, leading to a deleveraging of the private sector. A lower debt-to-GDP ratio in turn reduces the likelihood of a financial crisis. These results suggest that monetary policy can achieve a less risky financial system in the long run but could fuel financial instability in the short run. We also find that the ultimate effects of a monetary policy tightening on the probability of a financial crisis depend on the leverage of the private sector: the higher the initial value of the debt-to-GDP ratio, the more beneficial the monetary policy intervention in the long run, but the more destabilizing in the short run.
    Keywords: Credit and credit aggregates, Financial stability, Monetary Policy, Transmission of monetary policy
    JEL: E E52 E58 C21 C23
    Date: 2016

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