nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒03‒26
ten papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Are There Common Structural Determinants of Potential Output Growth in Europe?: An empirical exercise for 11 EMU countries By De Santis, Roberta; Esposito, Piero; Masi, Elena
  2. Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms By Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi; Liao, Chih-Hsing
  3. Risk Sharing in the Euro Zone: the Role of European Institutions By Valentina Milano
  4. Procedural Fairness and Economic Voting By Pedro C. Magalhães; Luís Aguiar-Conraria
  5. Sovereign yield spreads in the EMU: crisis and structural determinants By António Afonso; Frederico Silva Leal
  6. Financial Cycles with Heterogeneous Intermediaries By Nuno Coimbra; Hélène Rey
  7. Export quality and economic growth in the 2000s : new empirical evidence By Gilberto Libânio; Sueli Moro; Anna Carolina Londe
  8. On the possibility of automation-induced stagnation By Gasteiger, Emanuel; Prettner, Klaus
  9. The lost race against the machine: Automation, education and inequality in an R&D-based growth model By Prettner, Klaus; Strulik, Holger
  10. Regional Business Cycle and Growth Features of Japan By Masaru Inaba; Keisuke Otsu

  1. By: De Santis, Roberta (ISTAT-LUISS); Esposito, Piero (LUISS School of European Political Economy); Masi, Elena (MEF-­DT)
    Abstract: GDP growth in the Eurozone during the last twenty years continuously decreased. In addition, the global financial crisis and subsequent events seem to have, on average, shifted the trajectory of the Eurozone’s potential output downward. A key question is whether this trend is a permanent result of “secular stagnation” or if economic policies might improve the situation. In this paper, we intend to test the impact of several structural determinants of potential output growth using a dynamic panel data methodology for 11 main EMU members for the period 1996-2014. We also take into account the role of fiscal policy stance and debt dynamics to assess whether European fiscal rules, especially in the aftermath of the financial and sovereign debt crises, contributed to the slowdown of potential growth. Estimated results suggest that population, tertiary education, research and development expenditure, trade and financial openness, and institutional quality contributed significantly to potential output growth in the EMU during the period under examination. By estimating a quadratic relation between debt and potential growth, we find that negative effects dominate for values above 132%; however, the impact of public debt is statistically uncertain even for levels slightly below 100%. Once debt dynamics are taken into account, we find that excessive and prolonged consolidation, measured using the cyclically adjusted primary balance, might have, at best, no effect on potential growth when debt levels do not exceed the threshold level.
    Keywords: determinants of growth; potential output growth; reforms
    JEL: O29 O41 O43 O47
    Date: 2017–03–17
  2. By: Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi; Liao, Chih-Hsing
    Abstract: This study develops a Schumpeterian growth model with endogenous entry of heterogeneous firms to analyze the effects of monetary policy on economic growth via a cash-in-advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate affects the distribution of innovations that are implemented and would have an inverted-U effect on economic growth if the entry cost is sufficiently large. We also calibrate the model to aggregate data of the US economy and find that the growth-maximizing inflation rate is about 3%, which is consistent with recent empirical estimates.
    Keywords: monetary policy, inflation, economic growth, heterogeneous firms
    JEL: E41 O3 O4
    Date: 2017–03
  3. By: Valentina Milano (LUISS "Guido Carli" University)
    Abstract: We study risk sharing in the Euro Area (EA) and compare it to the US federation. Using the method of variance decomposition first implemented by Asdrubali et al. (1996), we update and revisit the main channels of risk sharing (net factor income, international transfers and credit markets). We contribute to this literature by splitting the credit market channel into two parts: smoothing achieved through private institutions (markets) and the public sector (national governments and official European institutions). We find that the role played by European institutions (i.e., public lending from the ESFS, ESFM, ESM and the European Commission) has been quite relevant during the recent financial crisis and largely compensated the reduced role of national governments.
    Keywords: Risk sharing, Euro Area, European transfers, income insurance, international financial integration.
    JEL: E2 E6 F15 G15
    Date: 2017
  4. By: Pedro C. Magalhães (ICS-University of Lisbon); Luís Aguiar-Conraria (Department of Economics/NIPE, University of Minho)
    Abstract: What accounts for the instability of economic voting? Contextual factors assumed so far to affect this relationship include the degree of control over the economy exerted by governments, their partisan-ideological composition, or even voters’ experience with democratic elections. In this paper, we provide an alternative account. Based on a vast literature originating in social and organizational psychology, we propose the existence of a process-outcome interaction: short-term outcomes matter, but the weight voters assign to them depends on the extent to which governance is perceived to adhere to principles of procedural fairness. Based on data on twenty years of elections in the OECD countries, we show that the strength of the relationship between GDP growth and the share of the vote for the incumbent parties does depends on the perceived procedural fairness in governance. We conduct extensive robustness tests, including the use of alternative indicators of fairness and survey data.
    Date: 2017
  5. By: António Afonso; Frederico Silva Leal
    Abstract: We use a panel of 11 EMU countries in the period 2000-2014 to assess the importance of political and economic determinants as explanatory factors in sovereign bond yield spreads. According to the results, there is evidence that those spread determinants gained importance after the beginning of the financial crisis. Following the crisis, the debt ratio, fiscal balance, expenditure on pension funds, the level of liquidity, GDP growth rate, and structural reforms have become relevant determinants of sovereign spreads, while fiscal rules have reduced spreads. Key Words : Public Debt, Sovereign Spreads, Fiscal Policy, Financial Crisis, EMU
    JEL: E43 E62 G01 H63
    Date: 2017–03
  6. By: Nuno Coimbra; Hélène Rey
    Abstract: This paper develops a dynamic macroeconomic model with heterogeneous financial intermediaries and endogenous entry. It features time-varying endogenous macroeconomic risk that arises from the risk-shifting behaviour of financial intermediaries combined with entry and exit. We show that when interest rates are high, a decrease in interest rates stimulates investment and increases financial stability. In contrast, when interest rates are low, further stimulus can increase systemic risk and induce a fall in the risk premium through increased risk-shifting. In this case, the monetary authority faces a trade-off between stimulating the economy and financial stability.
    JEL: E32 E44 G21
    Date: 2017–03
  7. By: Gilberto Libânio (Cedeplar-UFMG); Sueli Moro (Cedeplar-UFMG); Anna Carolina Londe (Cedeplar-UFMG)
    Abstract: This paper examines the relationship between composition of exports and economic growth for a large set of countries, between 2000 and 2013, following the assumption that the technological structure of exports has important implications for economic development. The paper builds an index of exports quality, based on the classification by technological intensity: primary products, resource-based manufactures, low-tech, medium-tech and high-tech manufactures. Then, we estimate the relationship between quality of exports and economic growth by using panel data analysis. The results suggest that the export quality index is highly significant to explain economic growth. Between 2000 and 2008, booming demand for commodities benefited exporters of primary products and resource-based manufactures, and lower export quality is associated with higher rates of economic growth. For 2009-2013, in turn, results confirm what is expected by theory and suggest that export structures with higher technological content have brought about positive effects on economic performance.
    Keywords: exports, technology, economic growth, panel data.
    JEL: O11
    Date: 2017–03
  8. By: Gasteiger, Emanuel; Prettner, Klaus
    Abstract: We analyze the long-run growth effects of automation in the standard overlap- ping generations framework. We show that, in contrast to other neoclassical models of capital accumulation, automation does not promote growth but induces economic stagnation. The reason is that automation suppresses wages, which are the only source of investment in the overlapping generations framework.
    Keywords: automation,robots,investment,stagnation,economic growth,overlapping generations model
    JEL: J10 J20 O14 O33 O41
    Date: 2017
  9. By: Prettner, Klaus; Strulik, Holger
    Abstract: We analyze the effect of automation on economic growth and inequality in an R&D-based growth model with two types of labor: highskilled labor that is complementary to machines and low-skilled labor that is a substitute for machines. The model predicts that innovationdriven growth leads to increasing automation, an increasing skill premium, an increasing population share of graduates, increasing income and wealth inequality, a declining labor share, and (in an extension of the basic model) increasing unemployment. In contrast to Piketty's famous claim that faster economic growth reduces inequality, our theory predicts that faster economic growth promotes inequality.
    Keywords: Automation,R&D-Based Growth,Inequality,Wealth Concentration
    JEL: E23 E25 O31 O33 O40
    Date: 2017
  10. By: Masaru Inaba; Keisuke Otsu
    Abstract: We study the features of regional business cycles and growth in Japan. We find evidence of unconditional convergence over the 1955-2008 period. For the 1975-2008 period, we find evidence of convergence conditional on TFP gap, population growth, private investment rate and TFP growth. We also find that the consumption-output correlation puzzle exists, which implies that the idiosyncratic income shocks are not shared among prefectures and regions. Our analysis implies that frictions in financial markets are responsible for the low consumption risk-sharing among prefectures.
    Keywords: Japanese Economy; Regional Convergence; Regional Business Cycle Synchronization
    JEL: E01 E32 O47
    Date: 2017–03

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