nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒01‒08
four papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Business Cycles, Investment Shocks, and the "Barro-King" Curse By Guido Ascari; Louis Phaneuf; Eric Sims
  2. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By Filippo De Marco; Tomasz Wieladek
  3. Fractional Dynamics of Natural Growth and Memory Effect in Economics By Valentina V. Tarasova; Vasily E. Tarasov
  4. Back to Basics: Basic Research Spillovers, Innovation Policy and Growth By Akcigit, Ufuk; Hanley, Douglas; Serrano-Velarde, Nicolas

  1. By: Guido Ascari; Louis Phaneuf; Eric Sims
    Abstract: Recent empirical evidence identifies 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 profiles of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary effect 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-specific 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 effects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.
    JEL: E31 E32
    Date: 2016–12
  2. By: Filippo De Marco; Tomasz Wieladek
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs’ asset growth contracts by 6.9% in the first year of a new bankfirm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements, SME real effects, relationship lending, microprudential and monetary policy
    JEL: G21 G28 E51
    Date: 2016
  3. By: Valentina V. Tarasova; Vasily E. Tarasov
    Abstract: A generalization of the economic model of natural growth, which takes into account the power-law memory effect, is suggested. The memory effect means the dependence of the process not only on the current state of the process, but also on the history of changes of this process in the past. For the mathematical description of the economic process with power-law memory we used the theory of derivatives of non-integer order and fractional-order differential equation. We propose equations take into account the effects of memory with one-parameter power-law damping. Solutions of these fractional differential equations are suggested. We proved that the growth and downturn of output depend on the memory effects. We demonstrate that the memory effect can lead to decrease of output instead of its growth, which is described by model without memory effect. Memory effect can lead to increase of output, rather than decrease, which is described by model without memory effect.
    Date: 2016–12
  4. By: Akcigit, Ufuk; Hanley, Douglas; Serrano-Velarde, Nicolas
    Abstract: This paper introduces a general equilibrium model of endogenous technical change through basic and applied research. Basic research differs from applied research in the nature and the magnitude of the generated spillovers. We propose a novel way of empirically identifying these spillovers and embed them in a framework with private firms and a public research sector. After characterizing the equilibrium, we estimate our model using micro-level data on research expenditures by French firms. Our key finding is that standard innovation policies (e.g., uniform R&D tax credits) can accentuate the dynamic misallocation in the economy by oversubsidizing applied research. Policies geared towards public basic research and its transmission to the private sector are significantly welfare improving.
    Keywords: applied research; basic research; Endogenous Growth; government spending; innovation; productivity; Research and Development; spillover.
    JEL: J82 L25 L50 O31 O38 O40
    Date: 2016–12

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