nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2022‒12‒19
29 papers chosen by
Georg Man

  1. Financial development cycles and income inequality in a model with good and bad projects. By Spiros Bougheas; Pasquale Commendatore; Laura Gardini; Ingrid Kubin
  2. The Elusive Link Between FDI and Economic Growth By Agustin Benetrix; Hayley Pallan; Ugo Panizza
  3. Does FDI intensify Economics Growth? Evidence From China and India By Neharkar, Pratibha; Vishnu, Kedar
  4. Monthly Report No. 5/2022 - FDI in Central, East and Southeast Europe By Alexandra Bykova; Olga Pindyuk
  5. The Credit Channel of Public Procurement By Ricardo Duque Gabriel
  6. Economic fundamentals and stock market valuation: a CAPE-based approach By Maria Ludovica Drudi; Federico Calogero Nucera
  7. Necessity of Rational Asset Price Bubbles in Two-Sector Growth Economies By Tomohiro Hirano; Ryo Jinnai; Alexis Akira Toda
  8. Crises Do Not Cause Lower Short-Term Growth By Kaiwen Hou; David Hou; Yang Ouyang; Lulu Zhang; Aster Liu
  9. Institutional Quality and Macrofinancial Resilience in Asia By Beirne, John; Panthi, Pradeep
  10. Governing the Financial System: A Theory of Financial Resilience By Salter, Alexander; Tarko, Vlad
  11. Bilateral Remittance Inflows to Asia and the Pacific: Countercyclicality and Motivations to Remit By Kim, Kijin; Ardaniel, Zemma; Kikkawa, Aiko; Endriga, Benjamin
  12. Emigration and Capital Flows: Do Migrants’ Skills Matter? By Dramane Coulibaly; Blaise Gnimassoun
  13. What Happens in China Does Not Stay in China By William Barcelona; Danilo Cascaldi-Garcia; Jasper Hoek; Eva Van Leemput
  14. The rise and fall of global financial flows in EU 15: new evidence using dynamic panels with common correlated effects By Mariam Camarero; Silviano Alejandro Muñoz; Cecilio Tamarit
  15. Does Globalization Promote Financial Integration in South Asian Economies? Unveiling the Role of Monetary and Fiscal Performance in Internationalization By Ali, Amjad; Ehsan, Rehan; Audi, Marc; Hamadeh, Hani Fayad
  16. Spillovers from US Monetary Shocks: Role of Policy Drivers and Cyclical Conditions By Arbatli-Saxegaard, Elif; Furceri, Davide; Gonzalez Dominguez, Pablo; Ostry, Jonathan; Peiris, Shanaka
  17. Financialisation, varieties of macroeconomic regimes and stagnation tendencies in a stylised Kaleckian model By Hein, Eckhard
  18. Medium-term investment responses to activity shocks: the role of corporate debt By Barrela, Rodrigo; Lopez-Garcia, Paloma; Setzer, Ralph
  19. Does Fintech Lending Lower Financing Costs? Evidence From An Emerging Market By Jose Renato Haas Ornelas; Alexandre Reggi Pecora
  20. Beliefs, Aggregate Risk, and the U.S. Housing Boom By Margaret M. Jacobson
  21. LTV regulation and housing bubbles By Claire Océane Chevallier; Sarah El Joueidi
  22. An Approach for Housing Wealth Estimation: The Mexican Case By García Ana Laura; González Juan Pedro; Velázquez Jhasua
  23. Inequality, Debt Dynamics and the Incidence of Tax Rates: Addressing Macroeconomic Instability in a Post Keynesian Model By Clara Zanon Brenck
  24. Taxing Consumption in Unequal Economies By Patrick Macnamara; Myroslav Pidkuyko; Raffaele Rossi
  25. How does tax structure affect income inequality? Empirical evidence from Sub-Saharan Africa By Gervasio SEMEDO; Bertrand LAPORTE; Asbath ALASSANI
  26. Macroeconomic and policy implications of eurobonds By Cristina Badarau; F. Huart; I. Sangaré
  27. An ergodic theory of sovereign default By Pierri, Damian Rene; Seoane, Hernán
  28. The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs By Farzana Alamgir; Johnny Cotoc; Alok Johri
  29. Relevance of financial development and fiscal stability in dealing with disasters in Emerging Economies By Valeria Terrones; Richard S. J. Tol

  1. By: Spiros Bougheas; Pasquale Commendatore; Laura Gardini; Ingrid Kubin
    Abstract: We introduce a banking sector and heterogeneous agents in the Matsuyama et al. (2016) dynamic over-lapping generations neoclassical model with good and bad projects. The model captures the benefits and costs of an advanced banking system which can facilitate economic development when allocates resources to productive activities but can also hamper progress when invests in projects that do not contribute to capital formation. When the economy achieves higher stages of development it becomes prone to cycles. We show how the disparity of incomes across agents depends on changes in both the prices of the factors of production and the reallocation of agents across occupations.
    Keywords: banks; financial innovation; economic development; business cycles; income inequality
    Date: 2022
  2. By: Agustin Benetrix (IM-TCD, Trinity College Dublin); Hayley Pallan (World Bank); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper revisits the link between FDI and economic growth in emerging and developing economies. When we study the early decades of our sample, we find that there is no statistically significant correlation between FDI and growth for countries with average levels of education or financial depth. In line with previous contributions, we find that this correlation is positive and statistically significant for countries with sufficienty well-developed financial sectors or high levels of human capital. However, we also find that the link between FDI and growth varies over time. For more recent periods, we find a positive and statistically significant relationship between FDI and growth for the average country, with local conditions having a negative e ect on this link. We also develop a novel instrument aimed at addressing the endogeneity of FDI inflows. Instrumental variable estimates suggest that our results are unlikely to be driven by endogeneity.
    Keywords: FDI, Economic Growth, Human Capital, Financial Development
    JEL: F21 F43 C21 C26
    Date: 2022–11–30
  3. By: Neharkar, Pratibha; Vishnu, Kedar
    Keywords: Agribusiness
    Date: 2021
  4. By: Alexandra Bykova (The Vienna Institute for International Economic Studies, wiiw); Olga Pindyuk (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: ​This issue of the wiiw Monthly Report replaces our earlier series of the wiiw FDI Report. FDI in Central, East and Southeast Europe Data availability and preliminary results for 2021 by Alexandra Bykova The rebound seen in 2021 in FDI inflows into CESEE was in line with global trends; the figure was 14.1% up on the pre-crisis level of 2019. Latvia emerged in the leading position in per capita terms. Preliminary FDI data for 2021 are available from the most recent update of the wiiw FDI Database. This is the first of two FDI data releases planned for this year. Strong post-COVID FDI rebound likely to be short lived by Olga Pindyuk After a sharp decline in 2020, global FDI inflows picked up markedly in 2021; however, the recovery was very uneven. The FDI inflow dynamics in CESEE show considerable variation between the countries. The number of greenfield projects announced increased in over half of the CESEE countries, but the recovery is likely to be short lived. Monthly and quarterly statistics for Central, East and Southeast Europe
    Keywords: FDI inflows, FDI outflows, FDI stocks, FDI by instrument of financing, greenfield FDI, supply chains, near-shoring, re-shoring, business services
    Date: 2022–05
  5. By: Ricardo Duque Gabriel
    Abstract: Public procurement accounts for one third of government spending. In this paper, I document a new mechanism through which government procurement promotes firm growth: firms use procurement contracts to increase the amount of cash-flow based lending. I use Portuguese administrative data over 2009-2019 and exploit public contests as a source of quasi-exogenous variation in the award of procurement contracts.
    Keywords: Credit, Collateral, Corporate Finance, Fiscal Policy, Public Procurement
    JEL: E62 G38 H32 H57 H81
    Date: 2022–11
  6. By: Maria Ludovica Drudi (Bank of Italy); Federico Calogero Nucera (Bank of Italy)
    Abstract: This paper estimates a fair-value model, based on macroeconomic fundamentals, of the Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio. By performing a multi-country analysis, we find that CAPE – a widely used metric for stock market valuations – is, in general, positively related to economic growth and negatively related to the real long-term interest rate and to measures of economic volatility computed using industrial production and inflation data. Empirical evidence arising from predictive regressions of real stock market returns indicates that deviations of CAPE from its estimated fair value are negatively related to future stock returns. A prediction model based on these deviations outperforms, in many cases, a model based on the CAPE levels both in sample and out of sample.
    Keywords: stock market valuation, CAPE, macroeconomic fundamentals, macroeconomic volatility, return predictability
    JEL: E44 G12
    Date: 2022–11
  7. By: Tomohiro Hirano; Ryo Jinnai; Alexis Akira Toda
    Abstract: We study a two-sector endogenous growth model in which entrepreneurs have access to a production technology subject to idiosyncratic investment risk (tech sector) and a dividend-paying asset (land) is traded. We prove that in any rational expectations equilibrium, the land price exceeds its fundamental value if and only if the time series of aggregate wealth is unbounded. When the leverage limit is relaxed beyond a critical value, the unique trend stationary equilibrium exhibits a phase transition from the fundamental regime to the bubbly regime with growth, accompanied by an increase in top-end wealth concentration measured by the Pareto exponent.
    Date: 2022–11
  8. By: Kaiwen Hou; David Hou; Yang Ouyang; Lulu Zhang; Aster Liu
    Abstract: It is commonly believed that financial crises "lead to" lower growth of a country during the two-year recession period, which can be reflected by their post-crisis GDP growth. However, by contrasting a causal model with a standard prediction model, this paper argues that such a belief is non-causal. To make causal inferences, we design a two-stage staggered difference-in-differences model to estimate the average treatment effects. Interpreting the residuals as the contribution of each crisis to the treatment effects, we astonishingly conclude that cross-sectional crises are often limited to providing relevant causal information to policymakers.
    Date: 2022–11
  9. By: Beirne, John (Asian Development Bank Institute); Panthi, Pradeep (Asian Development Bank Institute)
    Abstract: We examine the effect of institutions on macrofinancial resilience in Asia. Focusing on a panel of 12 Asian economies from the first quarter of 1996 to the fourth quarter of 2020, we find that institutions for economies with high levels of institutional quality support the resilience of real GDP per capita, FDI, and portfolio equity during periods of elevated financial stress. Our results also suggest portfolio rebalancing effects at play in crisis times. For economies with low levels of institutional quality, institutions may help to stabilize portfolio debt during crisis times, although the magnitude of the effects are small. As well as pointing toward resilience thresholds in institutional quality, we provide insights on critical subcomponents of overall institutional quality, notably rule of law, political stability, and regulatory quality. The findings help to inform the direction of policy efforts toward strengthening institutional capacity, and structural reforms for enhancing economic development and resilience to shocks.
    Keywords: institutional quality; economic development; international capital flows; Asia
    JEL: F32 F41 F43 O43
    Date: 2022–08
  10. By: Salter, Alexander; Tarko, Vlad (Mercury Publication)
    Abstract: We develop a theory of financial stability based on insights from the literature on polycentric governance and institutional resilience. We contend that top-down regulatory approaches to achieving financial stability will prove ineffective, due to various
  11. By: Kim, Kijin (Asian Development Bank Institute); Ardaniel, Zemma (Asian Development Bank Institute); Kikkawa, Aiko (Asian Development Bank Institute); Endriga, Benjamin (Asian Development Bank Institute)
    Abstract: We examine the countercyclicality of remittance inflows to the countries in Asia and the Pacific. We also identify major determinants of remittances using gravity models of bilateral remittances. We find that bilateral remittance inflows are countercyclical against the business cycle of a remittance-receiving country relative to a sending country. The degree to which remittances are countercyclical is found to vary significantly by subregion: Central Asia and Southeast Asia, including many remittance-dependent countries, show stronger countercyclicality than other subregions. The estimated models suggest that migrant stock is a top determinant of remittances, and that an increase in bilateral remittances is explained by a higher occurrence of disasters caused by natural hazards in receiving countries, appreciation of a receiving country’s currency value against that of the sending country, lower interest rate differential (receiver–sender), greater capital account openness and higher political instability, and lower costs of remittances. This suggests that an altruistic motivation to remit prevails in the region. We also find that the countercyclicality of remittances rises when recipient countries experience more frequent disasters, a higher old-age dependence ratio, less stringent capital control, and stable political climate.
    Keywords: remittances; Asia and the Pacific; countercyclicality; business cycle; gravity model
    JEL: C23 F24 F44
    Date: 2022–05
  12. By: Dramane Coulibaly; Blaise Gnimassoun
    Abstract: Emigration from developing countries to advanced countries leads to two-way capital flows. The life cycle theory predicts a contraction in savings and a deterioration of the external balance in the countries of origin. Depending on their impact on savings and investment, migrant remittances can reduce or even counterbalance this effect. We find robust empirical evidence for subSaharan African countries that only high-skilled emigration has a significant and negative impact on the current account in these countries. The brain drain induces net capital (savings) flight. We also find that highly-skilled emigrant’s contribution to remittances is less important compared to that of low-skilled emigrants. Incentives for the financing of home economies by skilled migrants would be beneficial.
    Keywords: international migration, saving, remittances, external imbalances, SSA.
    JEL: F22 F32 O55
    Date: 2022
  13. By: William Barcelona; Danilo Cascaldi-Garcia; Jasper Hoek; Eva Van Leemput
    Abstract: Spillovers from China to global financial markets have been found to be small owing to China's limited integration in the global financial system. In this paper, however, we provide evidence that China constitutes an important driver of the global financial cycle. We argue that because of China's importance for global consumption, stronger Chinese growth raises global growth prospects, inducing an increase in global risk sentiment and an expansion in global asset prices and global credit. Two contributions are key to this finding: (1) We construct a measure of China's credit impulse to identify Chinese policy-induced demand shocks. Our approach takes advantage of the fact that a primary tool of China's stabilization policy-encompassing monetary, fiscal, and regulatory policies-is controlling the amount of credit in the economy. Without China's credit impulse, it is difficult to discern global financial spillovers; (2) We estimate an alternative measure of Chinese GDP growth that captures its business cycle given data concerns about the smoothness of official GDP data. Without China's alternative GDP measure, it is difficult to attribute any global cycle movements to economic developments in China.
    Keywords: China; Growth; Credit Impulse; Global Financial Cycle; Global Business Cycle; Global Risk Sentiment; Commodity Prices
    JEL: C52 E50 F44
    Date: 2022–11–25
  14. By: Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain).); Silviano Alejandro Muñoz (University of València, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).); Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).)
    Abstract: This paper assesses capital mobility for a panel of 15 European countries for the period 1970- 2019 using dynamic common correlated effects modeling (DCCE) as proposed in Chudik and Pesaran (2015). In particular, we account for the existence of cross section dependence, slope heterogeneity, nonstationarity and endogeneity in a multifactor error correction model (ECM) that includes one homogeneous break. The analysis also identifies the heterogeneous structural breaks affecting the relationship for each of the individual countries. The ECM setting allows for a complete assessment of the domestic saving-investment relationship in the long-run as well as two other elements usually neglected: short-run capital mobility and the speed of adjustment. When we account for a single homogeneous break, this is found at the euro inception. We obtain that long-run capital mobility is high but not perfect yet. We also provide empirical evidence for the Ford and Horioka (2017)’s hypothesis, who argue that goods market integration is a necessary condition to obtain zero correlation between domestic saving-investment. Our results stress the role played by the euro as a booster for both financial and real integration. However, a complete degree of economic integration has not been fully achieved. Short-run capital was highly mobile for the whole period, with some exceptions, coinciding with turmoil episodes. Additionally, from the application of the CS-DL threshold analysis proposed by Chudik et al. (2016), we find that economic risk and openness play a key role in capital mobility.
    Keywords: Capital mobility; Feldstein-Horioka puzzle; Structural Breaks; Cross-sectional dependence; Cointegration, unit roots.
    JEL: F36 F45 O16
    Date: 2022–11
  15. By: Ali, Amjad; Ehsan, Rehan; Audi, Marc; Hamadeh, Hani Fayad
    Abstract: Presently, monitoring and analyzing financial integration has become a key function and requirement of the financial regulatory bodies and central banks of the countries. It has also been observed that financial integration is important to make the financial system streamlined and efficient which is eventually used to make monetary policies and to judge a country’s financial performance. Financial integration also highlights disruption in the financial system of the country if it does not work properly. This study has examined the impact of globalization on financial integration in the case of South Asian countries from 1996 to 2020. The selected South Asian countries are Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Financial integration is selected as the dependent variable, whereas political instability, globalization, fiscal performance, monetary performance, and economic misery are selected as explanatory variables. PP-FC, ADF-FC, IP&S, and LLC unit root tests have been used to check the stationarity of the variables. Panel least squares and fixed-effect model have been used for examining the dependence of financial integration on selected explanatory variables. The outcomes of unit root tests show that there is the same order of integration among the selected variables of the model i.e. first difference. The results show that level of political instability has a negative and insignificant impact on financial integration. The outcome shows that monetary performance, globalization, and economic misery have positive and significant impacts on financial integration. Fiscal performance has a negative and significant impact on financial integration. Based on the results, it suggested that South countries should make stable monetary and fiscal performance with a rise in globalization to raise financial integration. Moreover, political instability and economic misery should be discouraged for higher financial integration.
    Keywords: globalization, financial integration, political instability, monetary performance, fiscal performance, economic misery
    JEL: F36 F50 F60 O23
    Date: 2022
  16. By: Arbatli-Saxegaard, Elif (Asian Development Bank Institute); Furceri, Davide (Asian Development Bank Institute); Gonzalez Dominguez, Pablo (Asian Development Bank Institute); Ostry, Jonathan (Asian Development Bank Institute); Peiris, Shanaka (Asian Development Bank Institute)
    Abstract: We provide new evidence on the spillover effects from United States (US) interest rate changes, focusing on factors that are pertinent to the current conjuncture: weak recovery prospects in emerging market and developing economies (EMDEs), and the confluence of macroeconomic shocks shaping the path of interest rates in the US. The drivers of US monetary policy matter for the nature of spillovers. With an SVAR-IV model used to identify structural monetary policy, demand, and supply shocks, we find that an increase in US interest rates driven by demand shocks engenders a positive spillover to economic activity in the near term, while an exogenous tightening of monetary policy would have a large negative spillover effect. Spillovers from US monetary policy shocks also depend on the state of the business cycle, exerting larger effects when growth is weak outside the US. Finally, tighter US monetary policy affects the left tail of the growth distribution disproportionately: the fat left tail highlights the salience of growth at risk.
    Keywords: US monetary policy; foreign spillovers
    JEL: C30 E50 F40
    Date: 2022–05
  17. By: Hein, Eckhard
    Abstract: In this contribution, we review the research on the variety of macroeconomic demand and growth regimes in finance-dominated capitalism, on the regime shifts in the course of and after the 2007-09 crises, the drivers of these shifts and on the emerging stagnation tendencies. Results of this research are integrated into a stylised Kaleckian distribution and growth model, which allows to derive the pre-crisis regimes and the following regime shifts. By means of endogenising productivity growth into that model, we also show that post-crises stagnation tendencies and falling potential growth can be explained by those financialisation features generating low capital stock growth, i.e. depressed animal spirits of management of nonfinancial corporations, high propensities to save out of the different types of income after the crises, low government expenditure and deficit rates, in particular in the export-led mercantilist countries, and high profit shares. The latter has an independent depressing effect on innovation activities of firms and on productivity growth, too, which is also negatively affected by falling government expenditures on R&D and education.
    Keywords: Financialisation,macroeconomic regimes,regime shifts,stagnation,Kaleckian model
    JEL: E02 E60 E61 F62 G38
    Date: 2022
  18. By: Barrela, Rodrigo; Lopez-Garcia, Paloma; Setzer, Ralph
    Abstract: This paper analyses the implications of corporate indebtedness for investment following large economic shocks. The empirical analysis is based on a large Orbis-iBACH firm-level data set for euro area countries from 2005 to 2018. Our results suggest that investment of high-debt firms is significantly depressed for an extended period in the aftermath of economic crises. In the four years after a negative economic shock, the cumulative loss of capital of high-debt firms is around 15% higher than that of firms with lower debt burdens. The negative impact of high debt on investment is most evident for firms in Southern and Eastern Europe and for micro firms. These findings suggest a potentially significant negative impact of increased corporate indebtedness on investment in the post-COVID-19 recovery. JEL Classification: E22, F34, G31, G32
    Keywords: corporate debt, COVID shock, investment, leverage, local projections
    Date: 2022–11
  19. By: Jose Renato Haas Ornelas; Alexandre Reggi Pecora
    Abstract: Using proprietary data of virtually all unsecured working capital loans to small businesses in Brazil, we find that online Peer-to-Peer (P2P) lenders focus on smaller and riskier firms already served by banks. P2P clients get lower interest rates compared to traditional banks. Once they borrow from P2Ps, they find a lower rate on subsequent bank loans, indicating that banks try to recapture runaway borrowers. In response to P2P entry, incumbent banks in oligopolistic markets decrease their lending rates by 2.5 percentage points and expand credit to older firms with difficulty accessing credit. We rationalize these findings in a structural IO model of the banking sector, where banks and P2Ps have different profit functions and compete for clients with risk heterogeneity. We use the estimated model to calculate welfare gains. P2Ps significantly increase social welfare in oligopolistic markets by offering lower interest rates to riskier borrowers and forcing the banks to do the same. Welfare gains range from 10% of the local output in municipalities with only one incumbent bank to 1% in those with five banks.
    Date: 2022–10
  20. By: Margaret M. Jacobson
    Abstract: Endogenously optimistic beliefs about future house prices can account for the path and standard deviation of house prices in the U.S. housing boom of the 2000s. In a general equilibrium model with incomplete markets and aggregate risk, agents form beliefs about future house prices in response to shocks to fundamentals. In an income expansion with looser credit conditions, agents are more likely to underpredict house prices and revise up their beliefs. Matching the standard deviation and steady rise in house prices results in homeownership becoming less affordable later in the boom as well as consumption dynamics that match the data.
    Keywords: Housing boom; Aggregate risk; Heterogeneous agents; Incomplete information
    JEL: E20 E30 C68 R21
    Date: 2022–09–23
  21. By: Claire Océane Chevallier (Université du Luxembourg (Extramural Research Fellow)); Sarah El Joueidi (American University of Beirut and Université du Luxembourg (Extramural Research Fellow))
    Abstract: This paper develops a dynamic general equilibrium model in innite ho- rizon, with an endogenous banking sector, market sensitive regulatory con- straints, and in which deterministic rational housing bubbles may emerge. We are interested in the conditions under which housing bubbles may emerge and their impact on the economy. We show that 1) when agents face a LTV regulation, two dierent equilibria may emerge and coexist: a bubbleless and a housing bubble equilibria; 2) housing bubbles increase banks' size; 3) when banks face operational costs, housing bubbles reduce welfare. In an extension of the model we introduce a stochastic banking bubble and show that the combination of two market sensitive macroprudential regu- lations, LTV and VaR regulations, allows housing and banking bubbles to arise simultaneously. Their interaction amplies banks' balance sheet size. The welfare impact is positive.
    Keywords: "Banking bubble; Dynamic general equilibrium; Housing bubbles; Innitely lived agents; Loan-to-Value; Market sensitive regulations."
    JEL: E44 E60 G1 G21 G21
    Date: 2022
  22. By: García Ana Laura; González Juan Pedro; Velázquez Jhasua
    Abstract: Housing is the greatest asset held by most households, and it is an important determinant of their financing and consumption decisions. Despite the fact that measuring housing wealth is crucial for understanding households' economic behavior, this indicator is currently unavailable in Mexico due to the lack of data commonly required for its estimation. This paper proposes a more flexible methodology, based on the quantity times price approach and the perpetual inventory method, that eases data requirements while still meeting international guidelines. Our results suggest housing wealth in Mexico has followed an upward trend as percentage of GDP since 2005, reaching around 187% and 202% of GDP in 2020. In addition, our measure enables the calculation of other popular indicators concerning households, such as housing equity and household total net worth.
    Keywords: Housing;house hold wealth;perpetual inventory method;quantity times price approach
    JEL: R2 G51 E21 E22 R31 O18
    Date: 2022–11
  23. By: Clara Zanon Brenck (Department of Economics, New School for Social Research)
    Abstract: This paper explores different tax regimes in a Post-Keynesian model where workers get into debt to emulate the consumption of upper-income classes. The government taxes income to fund a social wage that would reduce workers’ need to get into debt. Three tax regimes are analyzed: taxing profits, managers’ wages, or both. In a numerical exercise, we explore the effects of changing the within-wage and functional inequalities. The government’s income tax choices and the distribution of the wage bill matter for the sustainability of the economy and for the relation between distribution and growth. Taxing only profits and reducing wage inequality is the best possible outcome if we were to wind down the unsustainability feature of Neoliberalism without sacrificing real performance.
    Keywords: Inequality, debt dynamics, tax regime, sustainable growth
    JEL: D31 E12 O41
    Date: 2022–11
  24. By: Patrick Macnamara; Myroslav Pidkuyko; Raffaele Rossi
    Abstract: This paper shows that linear consumption taxes are a powerful tool to implement efficient redistribution. We derive this result in an estimated life-cycle economy with labor and capital income risk that reproduces the distribution of income and wealth in the United States. Optimal policy calls for raising all fiscal revenues from consumption, and providing social insurance via a highly progressive wage tax schedule. Capital income and wealth should not be taxed. This policy reduces inequality and increases productivity, and brings large welfare gains both relative to the status-quo and to the case where consumption is not taxed. More than two-thirds of these gains are due to redistribution. Considering transitional dynamics, we show that our reform also generates large welfare gains in the short run.
    Keywords: optimal policy; inequality; consumption taxation; life-cycle; entrepreneurs
    JEL: E62 H21 H24
    Date: 2022–11
  25. By: Gervasio SEMEDO; Bertrand LAPORTE; Asbath ALASSANI
    Date: 2022
  26. By: Cristina Badarau (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux); F. Huart; I. Sangaré
    Abstract: This article explores the controversial subject of Eurobonds, by analyzing their economic consequences in an asymmetric monetary union like the Eurozone, where countries differ in size and policy preferences. We thus build a two-country monetary union DSGE model to compare three scenarios of government debt issuance: i) countries issue their own sovereign bonds (the baseline scenario is given the label "National bonds"); ii) countries issue common sovereign bonds without any limitations on the amount they can borrow (this scenario is labelled "Eurobonds"); and iii) there is a cap on the issuance of Eurobonds by each country so that the joint liability is limited (we call this scenario "Limited Eurobonds"). Assuming that a country decides to increase public spending and cares little about debt stabilization, we find that the spending multiplier would be the highest with Eurobonds and the lowest with Limited Eurobonds. The spillover effects on output in the rest of the union would be negative with Eurobonds but positive with Limited Eurobonds. The positive trade channel of the spillover effects is reinforced while the negative financial channel is reduced in the latter scenario. From the perspective of the monetary union as a whole, Limited Eurobonds could bring about higher overall output and produce larger benefits for aggregate household welfare depending upon country size. Altogether, our findings support the case for limited joint liability, especially when the public spending shock originates from a country which is smaller than the rest of the union, but not too small. © 2020 Elsevier Inc.
    Date: 2021
  27. By: Pierri, Damian Rene; Seoane, Hernán
    Abstract: We present the conditions under which the dynamics of a sovereign default model of private external debt are stationary, ergodic and globally stable. As our results are constructive, the model can be used for the accurate computation of global long run stylized facts. We show that default can be used to derive a stable unconditional distribution (i.e., a stable stochastic steady state), one for each possible event, which in turn allows us to characterize globally positive probability paths. We show that the stable and the ergodic distribution are actually the same object. We found that there are 3 type of paths: non-sustainable and sustainable; among this last category trajectories can be either stable or unstable. In the absence of default, non-sustainable and unstable paths generate explosive trajectories for debt. By deriving the notion of stable state space, we show that the government can use the default of private external debt as a stabilization policy.
    Keywords: Default; Private External Debt; Ergodicity; Stability
    JEL: F41 E61 E10
    Date: 2022–12–05
  28. By: Farzana Alamgir; Johnny Cotoc; Alok Johri
    Abstract: Sovereign spreads and the level of bureaucratic diversion of government spending vary widely across emerging economies and are correlated with each other. We build a sovereign default model where the government is constrained to use corrupt bureaucrats to deliver public goods and services in order to explain these facts. The diversion policy parameters are estimated using data on public resources and monitoring efficiency and used to calibrate the model. We use data on the average gift needed to be given to win public contracts in a country as a measure of bureaucratic diversion because it allows us to quantify diversion of public resources whereas tax evasion is hard to measure. We tie down the efficiency level to the Rule of Law index. We show that economies with low monitoring efficiency display higher diversion levels and higher default risk (and spreads) than those with higher efficiency. These results emerge because defaults reduce diversion levels and this benefit from default is higher for low monitoring efficiency economies, which encourages default.
    Keywords: sovereign default; country spreads; bureaucratic corruption; bribes; provision of public goods
    JEL: D73 F34 F41 G15 H63
    Date: 2022–11
  29. By: Valeria Terrones; Richard S. J. Tol
    Abstract: Previous studies show that natural disasters decelerate economic growth, and more so in countries with lower financial development. We confirm these results with more recent data. We are the first to show that fiscal stability reduces the negative economic impact of natural disasters in poorer countries, and that catastrophe bonds have the same effect in richer countries.
    Date: 2022–11

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