interest groups and the rise and decline of growth interest groups are known to exert a sclerotic impact on mean growth a la olson 1982 it is unknown however what impact if any groups exert on the volatility of growth an important hindrance to development in this article we first consider what impact we should expect olson groups to have on the volatility of growth we then estimate the relation between groups and growth volatility in a cross country panel using system generalized method of moments the findings indicate that groups are associated with growth stability in addition the findings suggest that interest groups may be a source of the stability observed in democracies

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

dynamic inefficiency endogenous growth and ponzi games we show that in competitive endogenous growth models without externalities balanced growth equilibria are dynamically efficient with learning by doing externalities dynamic inefficiency may exist but due to the mix of capital rather than its scale these results are obtained independent of whether or not lifetimes are finite or generations overlap in olg models with externalities we show that ponzi games may be feasible even though equilibria are characterized by undersaving

accounting for regional variance heterogeneity of growth this article explores heterogeneous behaviour in the conditional variance of growth we find that regional effects account for a good part of this behaviour when modelled alone however regional effects themselves have no particular meaning to this end we try to empirically account for the regional effects using a large set of economic political and demographic variables our results indicate that countries with past high levels of both investment and inflation cause growth to be less volatile today countries that have a greater number of changes in heads of government tend to experience lower growth volatility except in parliamentary democracies where the relationship reverses the greater the number of effective parties the lower the volatility for all regime types more strikes have no effect on volatility except for presidential democracies where volatility actually increases while more open economies that share presidential and legislative powers also have more volatile growth rates

optimism pessimism and financial bubbles this paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank dependent expected utility this rdu assumption can be viewed as a transformation of probabilities depending on the pessimism optimism of the agent the results show that pessimism favors the existence of deterministic bubbles when optimism may promote the existence of stochastic bubbles moreover under pessimism the rdu assumption may generate multiple bubbly equilibria the rdu assumption also leads to new conditions ensuring the absence of pareto optimality of the competitive equilibrium without bubbles these conditions still govern the existence of bubbles

switching bubbles from outside to inside bubbles abstract the united states has recently experienced two asset price bubbles the dot com and the housing bubbles these bubbles had very different effects on investment and debt of manufacturing firms in this paper i develop a framework to understand the differential effect of two types of rational bubbles i distinguish between i outside bubbles which i define as savers purchasing and selling costless assets not attached to inputs of production and ii inside bubbles which i define as savers buying an input of production e g land or houses only as a store of value the model is an olg economy with savers and entrepreneurs savers save to consume when they are old entrepreneurs can borrow to invest but they face a collateral constraint in this environment rational bubbles can emerge i show that the size of an inside bubble is larger i also find that when the economy switches from an outside to an inside bubble manufacturing or non housing investment and debt is lower consistent with the u s experience finally i show that even though steady state consumption is higher with an outside bubble a social planner would prefer an inside bubble when the productivity of entrepreneurs is low

volatility and financial intermediation abstract we consider an economy where risk neutral banks provide intermediation services and risk neutral producers demand credit to finance their working capital needs our model blends costly state verification with imperfect enforcement power we show that a weak legal system combined with high information verification costs leads to large first order effects of volatility on production employment and welfare a calibration illustrates that a 1 increase in the coefficient of variation of productivity shocks would reduce welfare by more than 1 we suggest that legal and information problems explains why volatility has profound effects on emerging market economies

finite lifetimes and the effects of budget deficits on national saving abstract even though realistic deficit policies shift sizable tax burdens to future generations the assumption of an infinite horizon is a good approximation for analyzing a deficit s short run saving effect on individuals who are neither liquidity constrained nor myopic recent u s experience casts significant doubt on these assumptions however and appears difficult to reconcile with the ricardian equivalence proposition that the timing of taxes does not affect national saving recent deficits have coincided with reduced national saving and a substantial increase in the share of gnp devoted to consumption

stock markets banks and growth panel evidence this paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976 98 and applying recent gmm techniques developed for dynamic panels on balance we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity omitted variables or unobserved country specific effects

patterns of technological accumulation the comparative advantage and relative impact of asian emerging economies in low carbon energy technological systems abstract this paper highlights the specificities of the patterns of low carbon energy technological innovations in selected asian emerging economies china and the members of asean 4 thailand malaysia indonesia and the philippines are included in this analysis for their identical structure of developing economy we outline a synthetic framework to cluster together the technologies with similar characteristics and analyse the changes of these characteristics over time this is in order to elucidate the scope of sectoral composition and specialisation of the selected economies and thereby understand the relative impact of science based low carbon energy technologies on the niches of technological excellence the findings show that china was keen to pursue its diversification strategy and develop its capability in low carbon energy technologies since the turn of the millennium however china has been gradually losing its momentum in more traditional areas like biomass hydroelectric power natural gas and fossil fuels the asean 4 economies on the other hand are showing interest in building a number of niches of technological excellence this highlights a contrasting relative technological advantage between larger and smaller economies our findings also indicate that many of the low carbon technologies in selected economies have yet to attain strong scientific grounding for development the findings of this paper are expected to provide some insights into low carbon energy technological development of emerging economies and be useful for other developing economies to establish their strategic moves for energy technology development

international differences in saving the adequacy of national saving has taken on increasing importance in an era of large external imbalances among the major industrial countries at least among economists current account imbalances are seen as largely the outcome of domestic patterns of saving and investment rather than trade practices thus the low level of saving in the united states rather than a failure of japan to open its economy is the primary cause of the u s current account deficit most of the discussion of the decline of u s saving has focused upon the emergence of a large government budget deficit in the 1980s and has largely ignored an equally large decline in an already low level of private saving at the same time much of what we think we know about private saving behavior and the potential effectiveness of various policies to influence it are dominated by experience only within our own country but many of the factors in which we are most interested have exhibited very limited historical variation within the united states and of necessity the conclusions are ambiguous the purpose of this note is to make use of an underutilized data source that provides information on the saving and investment of the industrial countries within a common accounting framework to examine the pattern of change over time and the similarity of response to various economic disturbances in the 1970s and 1980s the basic annual data are drawn from the system of national accounts sna submitted by the individual member countries to the oecd for the period 1960 87 while the original analysis was undertaken for the seven largest nations plus a representative set of six smaller countries but the summary reported here is limited to the united states japan and an aggregate of nine european countries the data are presented within a simple accounting framework that relates the current account surplus ca to the difference between domestic saving s and domestic investment i domestic saving and investment can be further subdivided into their public and private components

technological capabilities and industrialization abstract this paper reviews the implications for industrial strategy of recent research on technological capabilities at the firm and national levels after exploring the nature and determinants of microlevel technological development a simple framework for explaining the growth of national capabilities is set out based on the interplay of incentives capabilities and institutions each may suffer market failure and so require corrective intervention the experience of some industrializing countries is described to assess the validity of this framework it is concluded that interventions carefully and selectively applied are necessary for industrial success

speculative growth hints from the u s economy we propose a framework for understanding episodes of vigorous economic expansion and extreme asset valuations we interpret this phenomenon as a high valuation equilibrium with a low cost of capital based on optimism about future funding the key ingredient for such equilibrium is feedback from increased growth to a decline in the long run cost of capital this feedback arises when an expansion comes with technological progress in the capital sector when fiscal rules generate procyclical fiscal surpluses when the rest of the world has lower expansion potential or high saving needs and when financial constraints are relaxed by the expansion itself

industry growth and capital allocation does having a market or bank based system matter are market based or bank based financial systems better at financing the expansion of industries that depend heavily on external finance facilitating the formation of new establishments and improving the efficiency of capital allocation across industries we find evidence for neither the market based nor the bank based hypothesis while legal system efficiency and overall financial development boost industry growth new establishment formation and efficient capital allocation having a bank based or market based system per se does not seem to matter much

fiscal policy and regional output volatility evidence from russia eller m fidrmuc j and fungac ova z fiscal policy and regional output volatility evidence from russia regional studies this paper investigates the relationship between fiscal policy and output volatility in russian regions between 2000 and 2009 accounting for endogeneity between output volatility and fiscal developments by using system generalized method of moments gmm estimation techniques the results indicate that discretionary fiscal policy contributes to output volatility and induces macroeconomic instability at the regional level in russia this corroborates previous studies using cross country data to reduce business cycle fluctuations it would be necessary to curtail procyclical fiscal activism at the regional level e g via fiscal rules and sound institutions of fiscal federalism

a mechanism for booms and busts in housing prices the paper studies the dynamics of housing prices in a pure exchange overlapping generations framework a la samuelson 1958 and gale 1973 which is extended to include housing as a utility yielding durable good and a credit sector we completely characterize the equilibrium dynamics which alternates between an expansive regime where leveraged borrowing increases housing prices and a contractive regime where these variables decrease regime switches occur due to small but persistent income changes giving rise to boom bust cycles in housing prices price deviations from fundamentals are caused by leveraged borrowing and turn out to be fully welfare neutral

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

bubbles and self enforcing debt we characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods first we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period second we provide an equivalence result whereby the resulting set of equilibrium allocations with self enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles in contrast to the classic result by bulow and rogoff 1989a positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives

disciplining firms the impact of trade reforms on profit margins in indian industry the paper analyses the effects of increased trade exposure on the profitability of firms in indian industry while trade reforms are often expected to decrease profit margins as firms struggle to compete in international markets there is the possibility that increased competition may improve firm efficiency and provide a positive impetus to firm profitability this paper is different from many others in this area in that it considers both these possibilities an efficiency index is created to directly analyse the impact of changing efficiency levels on firm profit margins results indicate that liberalization significantly influenced profit margins however its main effect is through the impact that it has had on other firm variables market shares advertising r d and exports all of which changed after 1991 while exports have had a pro competitive effect on profit margins in the selected sample ad and r d both cause an increase in profit margins it is also found that neither capital nor manageri

exports of manufactures by developing countries emerging patterns of trade and location developing countries are rapidly increasing their shares of manufactured trade not just in labour intensive products but also in capital and skill intensive ones their shares are rising particularly rapidly in the high technology area however manufactured exports remain highly concentrated in the developing world with a few countries dominating all forms of export within the successful exporting countries there are significant differences in the technology content of exports these trends are difficult to explain with received trade theory even taking human capital into account or with reference to broad economic policies it is useful to bring in learning along with scale economies increasing returns and agglomeration as determinants of comparative advantage these factors imply market failures and so a role for policy in developing genuine comparative advantages this article suggests that emerging trade and location patterns in the developing work are explained by market imperfections and government policies to overcome them

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

bubbles and capital flow volatility causes and risk management emerging market economies are fertile ground for the development of real estate and other financial bubbles despite these economies significant growth potential their corporate and government sectors do not generate the financial instruments to provide residents with adequate stores of value capital often flows out of these economies seeking these stores of value in the developed world bubbles are beneficial because they provide domestic stores of value and thereby reduce capital outflows while increasing investment but they come at a cost as they expose the country to bubble crashes and capital flow reversals we show that domestic financial underdevelopment not only facilitates the emergence of bubbles but also leads agents to undervalue the aggregate risk embodied in financial bubbles in this context even rational bubbles can be welfare reducing we study a set of aggregate risk management policies to alleviate the bubble risk we show that prudential banking regulation sterilization of capital inflows and structural policies aimed at developing public debt markets and property rights all have a high payoff in this environment

perspectives on the sources of heterogeneity in indian industry abstract this paper examines technical efficiency variation across four industrial sectors in india using a stochastic production frontier technique the results obtained are comparable to technical efficiency distribution patterns obtained in other countries heterogeneity in firm level efficiency is examined against internal firm level and external industry and location characteristics the results suggest that managerial effectiveness significantly influences efficiency and that there are considerable benefits deriving from location within established industrial clusters for particular industries the methodology and findings indicate that the study of industry specific technical efficiency patterns is a useful analytic tool for tracking firm response to ongoing liberalization

macro financial linkages the role of the institutional framework abstract in this paper we assess the quantitative impact of various financial shocks on the real activity and explicitly address the issue of heterogeneity in the macro financial linkages for that purpose we use var models as well as the local projection method for 18 oecd countries based on quarterly data between 1995 and 2014 we take into account three main dimensions of the institutional framework likely to explain the observed cross country heterogeneity in the propagation of financial shocks the product market regulation the employment protection and the financial structure our main findings indicate that financial shocks have a stronger impact in countries characterized by a higher competition friendly regulatory stance a stronger employment protection and a more market oriented financial structure we also show that the varieties of capitalism described by the particular mix of different institutional arrangements do not play a significant role in shaping the macro financial linkages this result suggests that although considered individually goods labor and financial markets regulations are robustly linked to macroeconomic fluctuations there is no prima facie evidence for superior performance of any given mix of institutional arrangements observed in oecd countries

private sector share of external debt and financial stability evidence from bank loans abstract in the last two decades the private sector has contracted a substantially larger share in the total amount of foreign currency international debt private sector share of external debt especially in developing countries in this paper i empirically examine the effect of this phenomenon on bank loan prices i find that the private sector share of external debt negatively and significantly impacts the price of bank loans this result supports the hypothesis that private sector debt contributes to international financial stability to a greater degree than sovereign debt nevertheless this impact is canceled out in the presence of fixed exchange regimes that are unsuitable with respect to fundamentals in such circumstances the private sector may take advantage of capital market distortions that are maintained by official authorities and thus exposes the country to further financial instability additional results corroborate the observation that the gain in financial stability stems from more efficient use of funds and reduced monitoring costs

finance and consumption volatility evidence from india abstract the main objective of this paper is to explore the determinants of private consumption growth volatility in india focusing on the role of financial sector policies using data for india over the period 1950 2005 the results show that the implementation of financial repressionist policies is strongly associated with lower consumption volatility the results remain robust after controlling for a wide range of macroeconomic shocks and variables the presence of a threshold effect implies that the benefits of financial reforms in reducing consumption volatility can only be reaped when the financial system becomes sufficiently liberalized the results also indicate that the presence of a more open financial system may serve to dampen fluctuations in private consumption

do banks affect the level and composition of industrial volatility in theory better access to bank credit can reduce or increase output volatility depending on whether firms are more financially constrained during contractions or expansions this paper finds that the volatility of industrial output is lower in countries with more bank credit most of the reduction in volatility is idiosyncratic which follows from the ability of banks to pool and diversify shocks systematic volatility is reduced less strongly volatility dampening is achieved via countercyclical borrowing at the firm level short term borrowing is less or more negatively correlated with sales and inventories in countries with high levels of bank credit

globalization and financial development a model of the dot com and the housing bubbles abstract in the last decade the united states experienced the burst of the dot com and the housing bubbles i develop a model to study the relationship between globalization and the emergence of rational bubbles i also analyze how the effect of globalization on house prices depends on the type of bubble i show that bubbles cannot arise in a financially developed country in autarky in contrast as globalization progresses bubbles are more likely to appear in the financially developed country i also show that house prices increase with globalization only when the bubble is attached to houses this prediction is consistent with empirical evidence for u s metropolitan areas

do capital market imperfections exacerbate output fluctuations abstract we develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information in general a macroeconomic shock has additional effects created by a reallocation of funds between credit constrained and unconstrained firms as they have different marginal productivities we show however that the output response to shocks is not necessarily amplified and can be dampened by the presence of asymmetric information this depends on the impact of the shock on the composition of external and internal funds for credit constrained firms

economic growth with bubbles this paper presents a stylized model of economic growth with bubbles this model views asset price bubbles as a market generated device to moderate the effects of frictions in financial markets improving the allocation of investments and raising the capital stock and welfare the model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms and therefore the rate of economic growth the model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth

house prices collateral and self employment this paper explores the role of the collateral lending channel to facilitate small business starts and self employment in the period before the financial crisis of 2008 we document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries this increase in small business employment was particularly pronounced in industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral our results highlight the importance of the collateral lending channel during the period of the house price boom in the creation of small establishments we show that this effect is separate from the aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation

asset bubbles and the cost of economic fluctuations lucas 1987 2003 estimates that the cost of economic fluctuations is low a social planner would pay no more than 0 1 of permanent consumption to eliminate all future business cycle fluctuations the current paper extends lucas calculations by studying the costs of fluctuations arising from asset bubbles we estimate two classes of costs consumption volatility due to asset bubbles in a representative agent economy and consumption volatility that arises because households have heterogeneous exposure to the bubble assets we show that the magnitude of welfare costs is primarily driven by the existence of heterogeneity our benchmark calibration implies that the asset bubbles of the last decade generated a social welfare cost equal to a permanent 3 reduction in the level of national consumption if assets are held proportionately across the population these welfare costs fall by an order of magnitude our calculations are sensitive to the details of the calibration including the degree of balance sheet and trading heterogeneity the coefficient of relative risk aversion and the magnitude of the asset bubble our preferred specifications generate welfare costs ranging from 1 to 10 of permanent national consumption

the changing pattern of foreign trade specialization in indian manufacturing this paper examines the pattern of international trade specialization in indian manufacturing since the mid 1980s by using data on trade flows low technology sectors still dominate the categories for which india exhibits the largest degree of trade specialization by contrast high technology sectors are prevalent among the categories for which india is import dependent significantly india has experienced an improvement in the degree of specialization in some of the most dynamic sectors of world trade

equity markets and growth cross country evidence on timing and outcomes 1980 1995 abstract the rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact yet the need to focus on recent data poses implementation difficulties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries this paper overcomes some of these difficulties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980 1995 after describing recent theories on the role of stock markets in growth and considering a pure cross sectional empirical approach our panel vars show leading roles for stock market liquidity and the intensity of activity in traditional financial intermediaries on per capita output the findings underscore the potential gains associated with developing deep and liquid financial markets in an increasingly global economy

law finance and firm growth we investigate how differences in legal and financial systems affect firms use of external financing to fund growth we show that in countries whose legal systems score high on an efficiency index a greater proportion of firms use long term external financing an active though not necessarily large stock market and a large banking sector are also associated with externally financed firm growth the increased reliance on external financing occurs in part because established firms in countries with well functioning institutions have lower profit rates government subsidies to industry do not increase the proportion of firms relying on external financing the corporate finance literature suggests that market imperfections caused by conflicts of interest and informational asymmetries between corporate insiders and investors constrain firms in their ability to fund investment projects the magnitude of these imperfections depends in part on the effectiveness of the legal and financial systems because these systems differ across countries the literature implies that there should exist systematic cross country differences in firms ability to obtain external capital to finance investment in this paper we examine whether the underdevelopment of legal and financial systems does prevent firms in some countries from investing in potentially profitable growth opportunities in particular we focus on the use of long term debt or external equity to fund growth see our earlier work demirgut kunt and maksimovic 1996a which compares firms financial structures in developed and developing countries and finds the greatest difference to be in the provision of long term credit we estimate a financial planning model to obtain the maximum growth rate that each firm in our thirty country sample could attain without access to long term financing we then compare these predicted growth rates to growth rates realized by firms in countries with differing degrees of development in their legal and financial systems our approach enables us to identify specific characteristics of the legal and financial systems that are associated with long term financing of firm growth thus we provide a micro level test of the hypoth

budget deficits rhetoric and reality w v t hatever the real or imagined ills of the economy the news media most politicians and a fair proportion of the economics profession are quick to point to the culprit the budget deficit no matter that few appear to know or care precisely what deficit they are talking about or how it is measured no matter that few bother to explain in terms of a relevant model just how government deficits may be expected to impact the economy no matter that few offer any empirical data to sustain their judgments so budget deficits cause inflation budget deficits raise interest rates budget deficits bring on the trade deficits budget deficits crowd out investment budget deficits are an irresponsible mortgage on the future and budget deficits caused the october 1987 stock market crash and now threaten further financial cataclysms is there truth in any of these assertions or does it all depend budget deficits do matter and their effects contrary to barro s ricardian equivalence theorem can be substantial as most economists have recognized for at least half a century budget deficits can however be too small as well as too large to know which you have to measure them right and you have to analyze their role in the world in which we live pure walrasian and rational expectation market clearing models may prove more useful for academic advancement than for promotion of economic health i need not repeat many of the objections to the equivalence theorem raised by bernheim and gramlich and addressed by barro in this symposium however there is

growth enhancing bubbles this article challenges the conventional wisdom that speculation in financial markets reduces long run growth it shows that the real impact of a rational deterministic speculative bubble depends on the type of asset that is being speculated on speculative bubbles on equity raise the market value of firms thus encouraging entrepreneurship firm creation investment and growth on the other hand speculation on other types of assets is shown to be unambiguously growth impairing the model can explain some stylized facts about financial development and growth finally regulatory implications are discussed briefly

a new database on the structure and development of the financial sector this article introduces a new database of indicators of financial structure and financial development across countries and over time the database is unique in that it combines a wide variety of indicators that measure the size activity and efficiency of financial intermediaries and markets it improves on previous efforts by presenting data on the public share of commercial banks introducing indicators of the size and activity of nonbank financial institutions and constructing measures of the size of bond and primary equity markets this article introduces a new database the first to provide comprehensive measures of the development structure and performance of the financial sector this database is the first to define and construct indicators of the size and activity of nonbank financial intermediaries such as insurance companies pension funds and non deposit money banks it is also the first to include indicators of the size of primary equity markets and primary and secondary bond markets in constructing the database authors carefully deflate measures and match stock and flow variables

asset bubbles and credit constraints we provide a theory of rational stock price bubbles in production economies with infinitely lived agents firms meet stochastic investment opportunities and face endogenous credit constraints they are not fully committed to repaying debt credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions these bubbles command a liquidity premium and raise investment by raising the debt limit their collapse leads to a recession and a stock market crash

manufacturing growth and financial development evidence from oecd countries recent theoretical models conjecture that the development of the financial sector is essential for economic growth we investigate this hypothesis from a time series perspective and find that financial sector gdp is cointegrated for many oecd countries not so much with manufacturing gdp but mostly with manufacturing total factor productivity moreover this relation is in some instances characterized by long run causality in the sense of granger and lin however even within this homogeneous group of countries the variety of results suggests a more complex picture than is apparent from cross sectional evidence

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

offshore pariahs small island economies tax havens and the re configuration of global finance the stock of wealth held offshore is estimated at us 6 trillion many small island economies sies host offshore finance centers and some sies are highly dependent upon offshore finance extreme examples have over 90 of government revenues derived from finance sector activities since 1998 a series of international initiatives have been launched to combat harmful tax practices money laundering and inadequate financial regulation these initiatives will transform the economies of many sies this paper explores the dependence of many sies upon offshore finance and the barriers to diversification arising from their smallness and unique political economies

the credit effects of monetary policy evidence using loan commitments in addition to the usual channels monetary policy may affect spending by changing the supply of bank loans and the creditworthiness of borrowers this paper tests for these credit effects using a contractual difference across commercial bank loans the author finds that bank loans not made under a commitment slow after tight policy while loans under commitment accelerate or are unchanged this divergence coincides with reports of tighter credit by lenders and by small firms suggesting the divergence reflects a reduction in the supply of credit to the firms without commitments rather than a reduction in their demand for loans

the information technology revolution and the stock market evidence since 1968 the ratio of stock market capitalization to gdp has varied by a factor of 5 in 1972 the ratio stood at above unity but by 1974 it had fallen to 0 45 where it stayed for the next decade it then began a steady climb and today it stands above 2 we argue that the it revolution was behind this and moreover that the capitalization gdp ratio is likely to decline and then rise after any major technological shift the three assumptions that deliver the result are

intangible capital relative asset shortages and bubbles abstract purely technological factors can be a fundamental force behind the emergence of asset price bubbles in developed economies we analyze an economy in which the production technology utilizes both physical and intangible capital where the latter cannot be used as collateral for borrowing technological change in the form of increased importance of intangible capital in production sharpens the borrowing constraints of entrepreneurs leading to a scarcity of high yield assets relative to low yield ones this can create the conditions for asset bubbles additionally due to the financial frictions standard dynamic efficiency tests are not valid and bubbles are not pareto improving

a semi parametric panel data analysis on financial development economic volatility nexus in developing countries abstract this paper examines the effect of financial development on economic growth volatility in a sample of 50 developing countries from 1960 to 2016 since no conclusive results have been provided by previous studies on such association we employ a semi parametric panel fixed effects regression model as introduced by baltagi and li 2002 the semi parametric model does not impose any functional restriction on the relationship between financial development and economic volatility and helps to capture the existence of non linearities in the data we find that the financial development volatility relation is non linear with multiple turning points our findings make new evidences on the financial development economic volatility nexus

on the interplay between speculative bubbles and productive investment the aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones a three period lived overlapping generations model allows us to make this distinction agents have a portfolio decision when young they can invest in human capital that is a productive long term investment that provides a return during the following two periods when young or in the middle age they can invest in a bubble young individuals can also borrow on a credit market to finance the productive investment however the amount borrowed is limited by a credit constraint we show that the existence of a stationary bubble raises productive investment and production when the bubleless economy is credit constrained and dynamically efficient indeed young agents sell short the bubble to increase productive investments whereas traders at middle age transfer wealth to old age the bubble allows to relax the credit constraint we outline that a permanent technological shock inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital production and the bubble size we use our framework to discuss the effect on the occurrence of bubbles of financial regulation and fiscal policy

financial innovation the bright and the dark sides based on data from 32 countries over the period 1996 2010 this paper is the first to assess the relationship between financial innovation on the one hand and bank growth and fragility as well as economic growth on the other hand we find that different measures of financial innovation capturing both a broad concept and specific innovations are associated with faster bank growth but also higher bank fragility and worse bank performance during the recent crisis these effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks in spite of these seemingly ambiguous findings our evidence points to a positive net effect of financial innovation on economic growth financial innovation is associated with higher growth in countries and industries with better growth opportunities

government debt and corporate leverage international evidence abstract we empirically investigate the impact of government debt on corporate financing decisions in an international setting we show a negative relation between government debt and corporate leverage using data on 40 countries between 1990 2014 this negative relation is stronger for government debt that is financed domestically for firms that are larger and more profitable and in countries with more developed equity markets to address potential endogeneity concerns we use an instrumental variable approach based on military spending and a quasi natural experiment based on the introduction of the euro currency our findings suggest that government debt crowds out corporate debt

financial development unemployment volatility and sectoral dynamics abstract we document a negative and significant relationship between domestic financial development and unemployment volatility in developing and emerging economies demes and the absence of such relationship in advanced economies aes a business cycle labor search model with firm heterogeneity collateral constraints and interfirm input credit capital can quantitatively rationalize these facts greater financial development is associated with lower usage of input credit capital greater bank credit and greater capital accumulation all of which make firms more resilient in the presence of financial shocks firms increased shock resiliency stabilizes employment decisions ultimately leading to smoother unemployment fluctuations then by establishing explicit linkages between firms interfirm input credit acts as an important mechanism that fosters lower volatility across firms under greater financial development as such increases in financial development have a smaller impact in stabilizing unemployment in economies with higher average bank credit gdp ratios and less input credit usage which is the case of aes compared to economies with lower average bank credit gdp ratios and more input credit usage which is the case of demes

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

monetary policy and the global housing bubble what caused the housing boom of the 2000s a number of researchers have suggested that loose monetary policy during the first half of the 2000s was a primary cause of the substantial run up in house prices in many countries however using a common statistical approach we find that monetary policy was not the main factor that should not be surprising although low interest rates raise house prices the increase in prices during the mid 2000s was much larger than the historical relationship between the two variables would suggest instead we investigate further the link between the marked loosening in terms and standards for mortgage credit and the most rapid increases in house prices this link provides some evidence for a story where credit provision and the demand for housing fed on each other and helped spur the housing boom our work suggests a greater role for macroprudential regulation rather than monetary policy in managing asset price booms jane dokko brian m doyle michael t kiley jinill kim shane sherlund jae sim and skander van den heuvel

the volatility effect of diaspora s location remittances can transmit volatility from host to home countries for some common patterns of diaspora s geographical distribution in a migration portfolio model the overall risk of volatility of any set of diaspora location is decomposed into a contagion and a concentration risks a diaspora located in more volatile destinations induces a higher contagion risk while a diaspora located in few destination countries increases the concentration risk a series of estimations on a large panel of developing countries over 1995 2015 provide evidence for these two risks estimation of a structural model confirms that the geography of diaspora has an indirect impact on the origin country s aggregate instability through remittances

asset bubbles and endogenous growth abstract we study the interaction between productive and nonproductive savings in economies with endogenous long run growth as in the neoclassical growth setting with overlapping generations asset bubbles can exist in an economy with endogenous growth provided that they are not too large and that the growth rate in the equilibrium without bubbles exceeds the interest rate here the existence conditions for bubbles reflect parameters of tastes and technology we find that bubbles when they exist retard the growth of the economy perhaps even in the long run and reduce the welfare of all generations born after the bubble appears

fiscal policy in an endogenous growth model in a neoclassical growth model it is possible to make a case for public debt because a balanced growth path may be dynamically inefficient this paper shows that this possibility no longer holds in an endogenous growth model with constant external returns to capital it is shown that an increase in public debt reduces the growth rate so there always exists a future generation that will be harmed and that a reduction in public debt although it increases the growth rate cannot be pareto improving one current generation must be harmed

asset prices exchange rates and the current account this paper analyses the role of asset prices in comparison to other factors in particular exchange rates as a driver of the us trade balance it employs a bayesian structural var model that requires imposing only a minimum of economically meaningful sign restrictions we find that equity market shocks and housing price shocks have been major determinants of the us current account in the past accounting for up to 30 of the movements of the us trade balance at a horizon of 20 quarters by contrast shocks to the real exchange rate have been less relevant explaining about 9 and exerting a more temporary effect on the us trade balance our findings suggest that large exchange rate movements may not necessarily be the key element of an adjustment of today s large current account imbalances and that in particular relative global asset price changes could be a potent source of adjustment

capital market frictions and deposit constraints at banks following the investment cash flow literature we test whether bank lending is constrained by the availability of insured deposits a necessary condition for the existence of a bank lending channel of monetary policy we treat insured deposits as a type of internal fund similar to cash flows we use a simple model to sort out the possible identification issues in interpreting the correlation between lending and deposit growth including reverse causality and omitted variable bias to minimize the latter we control for loan demand we use tobin s q and other proxies we also split the sample by capital ratios under the assumption that the frictions facing banks in capital markets should be most severe for poorly capitalized banks the results are consistent with the existence of frictions in capital markets facing banks and show that such frictions forge a link between the supply of bank loans and the supply of insured deposits the frictions seem to matter only at small banks suggesting that the potential for a bank lending channel is limited

financial intermediary development and growth volatility do intermediaries dampen or magnify shocks the authors extend the recent literature on the link between financial development and economic volatility by focusing on the channels through which the development of financial intermediaries affects economic volatility their theoretical model predicts that well developed financial intermediaries dampen the effect of real sector shocks on the volatility of growth while magnifying the effect of monetary shocks suggesting that overall financial intermediaries have no unambiguous effect on growth volatility the authors test these predictions in a panel data set covering 63 countries over the period 1960 97 using the volatility of terms of trade to proxy for real volatility and the volatility of inflation to proxy for monetary volatility they find no robust relationship between the development of financial intermediaries and growth volatility weak evidence that financial intermediaries dampen the effect of terms of trade volatility and evidence that financial intermediaries magnify the impact of inflation volatility in low and middle income countries

india s manufactured exports comparative structure and prospects abstract the technological structure of export matters for their growth learning and path dependence mean that structures are difficult to change as technologies evolve trade liberalization per se is insufficient countries need to upgrade domestic skill and technology and attract sophisticated foreign direct investment fdi to dynamise their export structures a comparative analysis of indian manufactured exports suggests that their structure and positioning are not suited to sustained growth the base for rapid structural change through fdi or domestic capabilities is weak the current export slowdown in india reflects external conditions and may end soon however this does not assure rapid future growth

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

level and dynamics of financial depth consequences for volatility of gdp abstractthe existing literature documents positive but potentially non linear relationship between financial depth measured as private credit to gdp ratio and volatility of gdp in this paper we e

a neoclassical perspective on budget deficits i n the 1988 presidential campaign virtually every serious candidate spoke of the urgent need to trim government budget deficits public opinion polls have identified federal deficits as a key economic issue second only to unemployment while many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem others regard the fuss as much ado about nothing it is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations generally speaking there are three schools of thought concerning the economic effects of budget deficits neoclassical keynesian and ricardian before proceeding further it is useful to review the basic structure and implications of each paradigm the neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles budget deficits raise total lifetime consumption by shifting taxes to subsequent generations if economic resources are fully employed increased consumption necessarily implies decreased saving interest rates must then rise to bring capital markets into balance thus persistent deficits crowd out private capital accumulation in the current economic environment most economists would agree that these consequences would be highly detrimental

the information technology revolution and the stock market technological progress comes in waves the british industrial revolution 1760 1850 ushered in cort s puddling and rolling process for making iron crompton s mule for spinning cotton and the watt steam engine the second industrial revolution 1890 1930 witnessed the rise of electricity the internal combustion engine and the chemical industry the birth of information technology it may herald the start of a third industrial revolution a new technology or product is often developed by the single entrepreneur who initially finds it hard to get funds develop the product and find customers but if the product is good customers eventually line up and investors flock in other firms then move in to make the product and may drive the innovator out or acquire him whether he reaches the initial public offering ipo stage or is acquired by a listed firm though it takes time for the innovator to add value to the stock market indeed the innovation may at first reduce the market s value because some firms usually large or old will cling to old technologies that have lost their momentum figure 1 plots the market value of u s equity relative to gdp this paper argues that a the market declined in the late 1960 s because it felt that the old technologies either had lost their momentum or would give way to it and that b it innovators boosted the stock market s value only in the 1980 s if the stock market provides a forecast of future events then the recent dramatic upswing represents a rosy estimate about growth in future profits for the economy this translates into a forecast of higher output and productivity growth holding other things equal such as capital s share