nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒03‒05
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Openness and Growth: Is the Relationship Non-Linear? By Rangan Gupta; Lardo Stander; Andrea Vaona
  2. Factor Income Distribution and Endogenous Economic Growth - When Piketty meets Romer - By Irmen, Andreas; Tabakovic, Amer
  3. "Fiscal Policy, Economic Growth and Innovation: An Empirical Analysis of G20 Countries" By Horst Hanusch; Lekha S. Chakraborty; Swati Khurana
  4. Capital Accumulation and Dynamic Gains from Trade By Ravikumar, B.; Santacreu, Ana Maria; Sposi, Michael J.
  5. Interactions between fiscal multipliers and sovereign risk premium during fiscal consolidation: model based assessment for the euro area By Lalik, Magdalena
  6. Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area By Gross, Marco; Semmler, Willi

  1. By: Rangan Gupta (Department of Economics, University of Pretoria, South Africa); Lardo Stander (Department of Economics, University of Pretoria, South Africa); Andrea Vaona (Department of Economics, University of Verona, Italy and Kiel Institute for the World Economy, Germany)
    Abstract: Using a novel, augmented two–sector endogenous growth model appropriate for a small, open economy characterised by human capital accumulation and productive government expenditure, we analyse the nature of the relationship between openness and economic growth. In the augmented form, external openness enters the human capital accumulation function directly. Productive government expenditure also affects human capital accumulation, but relies on seigniorage revenue to finance the productive expenditure where seigniorage revenue is itself dependent on the level of openness. Specifically, the findings indicate two, opposing effects of openness on growth – a direct effect of openness on growth through the knowledge spillovers that affect human capital accumulation, and an indirect effect of decreasing seigniorage revenue on growth through decreasing productive government expenditure on human capital. We discuss conditions under which the resultant openness–growth curve can be concave or convex, but do not specify theoretical functional forms or values to unknown parameters in the model to provide a concise theoretical result. Rather, drawing samples of exact model–match countries over a sample period of 1980–2011, we rely on a semi–parametric, data–driven empirical approach augmented with a restricted cubic spline regression function to provide empirical impetus to the theoretical outcomes reported. We show that the relationship between openness and growth is non–linear and specifically, inverted U–shaped. The result suggests that openness can only have a positive impact on the growth-rate until a certain threshold–level, beyond which, the effect is negative.
    Keywords: Openness, seigniorage, knowledge spillovers, semi–parametric estimation, spline regression
    JEL: C14 C61 E21 O42
    Date: 2017–01
  2. By: Irmen, Andreas; Tabakovic, Amer
    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, Piketty’s Second Fundamental Law of Capitalism does not hold. However, in line with Piketty’s theory a smaller long-run growth rate goes together with a greater capital share. These 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.
    JEL: E10 O33 E25
    Date: 2016
  3. By: Horst Hanusch; Lekha S. Chakraborty; Swati Khurana
    Abstract: This paper analyzes the effectiveness of public expenditures on economic growth within the analytical framework of comprehensive Neo-Schumpeterian economics. Using a fixed-effects model for G20 countries, the paper investigates the links between the specific categories of public expenditures and economic growth, captured in human capital formation, defense, infrastructure development, and technological innovation. The results reveal that the impact of innovation-related spending on economic growth is much higher than that of the other macro variables. Data for the study was drawn from the International Monetary Fund's Government Finance Statistics database, infrastructure reports for the G20 countries, and the World Development Indicators issued by the World Bank.
    Keywords: Fiscal Policy; Public Expenditure; Defense; Innovation; Growth; Neo-Schumpeterian Economics
    JEL: H5 O30 O38
    Date: 2017–02
  4. By: Ravikumar, B. (Federal Reserve Bank of St. Louis); Santacreu, Ana Maria (Federal Reserve Bank of St. Louis); Sposi, Michael J. (Federal Reserve Bank of Dallas)
    Abstract: We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation. We examine transition paths for 93 countries following a permanent, uniform, unanticipated trade liberalization. Both the relative price of investment and the investment rate respond to changes in trade frictions. Relative to a static model, the dynamic welfare gains in a model with balanced trade are three times as large. The gains including transition are 60 percent of those computed by comparing only steady states. Trade imbalances have negligible effects on the cross-country distribution of dynamic gains. However, relative to the balanced-trade model, small, less-developed countries accrue the gains faster in a model with trade imbalances by running trade deficits in the short run but have lower consumption in the long-run. In both models, most of the dynamic gains are driven by capital accumulation.
    Keywords: Welfare gains from trade; Dynamic gains; Capital accumulation; Trade imbalances
    JEL: E22 F11 O11
    Date: 2017–02–27
  5. By: Lalik, Magdalena
    Abstract: The paper presents a model-based assessment of fiscal multipliers operating in the euro area during the period 2011-2014. The assessment is conditional on two distinct reactions of the sovereign risk premium (either responding endogenously to fiscal shocks or being an exogenous process) and two types of monetary policy (accommodative and non-accommodative). Applying those multipliers to the amount of austerity measures implemented in years 2011-14, the paper evaluates their possible fallouts and shows that the output effects of the recent fiscal consolidations were largely determined by two key factors: financial markets’ sentiments and the composition of adopted measures. Finally, the paper also highlights the importance of modelling of government’s interest payments for predicting the evolution of debt-to-GDP ratios. JEL Classification: E42, E32, F42, F45
    Keywords: debt dynamics, euro area, Fiscal multiplier, macroeconomic models, sovereign risk premium
    Date: 2017–02
  6. By: Gross, Marco; Semmler, Willi
    Abstract: We develop a theoretical model that features a business cycle-dependent relation between out- put, price inflation and inflation expectations, augmenting the model by Svensson (1997) with a nonlinear Phillips curve that reflects the rationale underlying the capacity constraint theory (Macklem (1997)). The theoretical model motivates our empirical assessment for the euro area, based on a regime-switching Phillips curve and a regime-switching monetary structural VAR, employing different filter-based, semi-structural model-based and Bayesian factor model-implied output gaps. The analysis confirms the presence of a pronounced convex relationship between inflation and the output gap, meaning that the coefficient in the Phillips curve on the output gap recurringly increases during times of expansion and abates during recessions. The regime switching VAR reveals the business cycle dependence of macroeconomic responses to monetary policy shocks: Expansionary monetary policy induces less pressure on inflation at times of weak as opposed to strong growth; thereby rationalizing relatively stronger expansionary policy, including unconventional volume-based policy such as the Expanded Asset Purchase Programme (EAPP) of the ECB, during times of deep recession. JEL Classification: E31, E42, E52, E58
    Keywords: euro area, inflation targeting, monetary policy, monetary VAR, nonlinearity, Phillips curve
    Date: 2017–01

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