three principles for market based credit regulation a key lesson of the financial crisis 2007 09 is that the bagehot rule lend freely but at a high rate needs to be updated for the emerging market based credit system a modern rule is suggested markets not banks outside spread not inside spread core not periphery

the finance growth link in latin america this paper analyzes the relationship between financial development and economic growth in latin america with a granger causality test and impulse response functions in a panel vector autoregression var model with annual observations from a sample of 18 countries from 1962 to 2005 it is shown that while economic growth causes financial development financial development does not cause economic growth this finding is robust to different model specifications and different financial indicators interestingly when the sample is divided according to different income levels and institutional quality there is two way causality between financial development and economic growth only for the middle income group and for countries with stronger rule of law and creditor rights the impulse response functions show that a shock to financial development has a positive impact on economic growth only for these subsamples but the net effect of financial development on growth is relatively small during the 1980s most latin american countries suffered from distorted financial systems in this decade the government kept interest rate controls allocated credit arbitrarily and deterred the expansion of security markets and the creation of new financial institutions edwards 1999 nonetheless there has been a significant improvement on the levels of financial development in the region while credit to the private sector as a share of gross domestic product gdp in the latin american region was on average 12 in the 1960s it grew to an average of 29 in the early 2000s 1 even though latin american countries experienced significant financial reforms in the 1990s that promoted financial deregulation and the growth of the stock market financial development indicators show that the region is financially underdeveloped when compared to other emerging regions 2 therefore lack of financial depth may be a barrier to better economic performance in latin america the link between financial development and economic growth is complex because the direction of causation between the two variables may run both ways theoretical and empirical analyses support causality running from financial development to economic growth supply leading hypothesis but there is also evidence that economic growth causes financial

financial development and financing constraints international evidence from the structural investment model this article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment the financing constraints are inferred from the investment euler equation by assuming that the firm s stochastic discount factor is a function of the firm s financial position specifically the stock of liquid assets the magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development the size effect business cycles and legal environment effects are also considered copyright 2003 oxford university press

optimal taxation in models of endogenous growth we study the problem of optimal taxation in three infinite horizon representative agent endogenous growth models the first model is a convex model in which physical and human capital are perfectly symmetric our second model incorporates elastic labor supply through a lucas style technology analysis of these two models points out the danger of assuming that government expenditures are exogenous in our third model we include government expenditures as a productive input in capital formation showing that the limiting tax rate on capital is no longer zero in numerical simulations we find similar effects on growth and welfare in all three models

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

on the irrelevance of government debt when taxes are distortionary abstract we consider a government that can only raise funds by levying distortionary taxes we allow the government to collect taxes in a given period that are based on incomes earned in previous periods we show that once we do so given any debt path the government can adjust its tax policy so as to attain that debt path without affecting equilibrium allocations or prices

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

credible monetary policy in an infinite horizon model recursive approaches abstract this paper develops recursive methods to study optimal and time consistent policy in dynamic models we analyze a version of calvo s 1978 monetary model and show that its time consistent outcomes can be completely characterized as the largest fixed point of either of two operators recursive application of these operators provides a computing algorithm which always converges to the set of time consistent outcomes finally we obtain valuable information about the nature of time consistent outcomes it is discovered in particular that all such outcomes are markovian the methods obtained are intuitive and should be useful for many applications journal of economic literatureclassification numbers e61 e52 c61

government spending and welfare with returns to specialization we explore a novel channel through which government spending can stimulate consumption and welfare through its effects on aggregate productivity without directly affecting either utility or production possibilities in the presence of monopolistic competition and increasing returns to specialization it is shown that government spending can partly alleviate the inefficiencies of monopolistic competition this is because government spending generates an endogenous increase in total factor productivity by increasing the variety of intermediate goods if the degree of increasing returns to variety is large enough a rise in such wasteful government spending may increase consumption levels enough to increase welfare

creditor protection laws debt financing and corporate investment over the business cycle we examine how legal creditor rights are related to debt financing and corporate investment over the business cycle using firm level data from 40 countries we find that creditor rights are associated with greater debt financing and investment during economic downturns but creditor rights have a significantly smaller effect during expansions the beneficial effects of creditor rights during recessions are stronger for firms that are more likely to have severe shareholder bondholder agency problems we also find that during recessions relative to expansions strong creditor rights are associated with a smaller decline in net capital flows our findings are consistent with credit market frictions increasing during recessions and with stronger creditor rights decreasing the negative effects of these frictions overall the results suggest that better creditor protection laws help moderate the decline in debt financing and investment during recessions

from institutions to financial development and growth what are the links this paper presents an integrated overview of the literature linking institutions financial development and economic growth from the large body of research on institutional development the paper first selects those contributions that make it possible to study the role of institutional arrangements in ameliorating worsening the information frictions and transaction costs that characterize the development of financial markets the paper then investigates the theoretical mechanisms by which these specific frictions affect economic growth and presents the stock of empirical evidence quantifying the impact of institutions on growth through financial development

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association

financial and legal constraints to growth does firm size matter using a unique firm level survey database covering 54 countries we investigate the effect of financial legal and corruption problems on firms growth rates whether these factors constrain growth depends on firm size it is consistently the smallest firms that are most constrained financial and institutional development weakens the constraining effects of financial legal and corruption obstacles and it is again the small firms that benefit the most there is only a weak relation between firms perception of the quality of the courts in their country and firm growth we also provide evidence that the corruption of bank officials constrains firm growth

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

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

on the optimality of age dependent taxes and the progressive u s tax system abstract in life cycle economies where an individual s optimal consumption work plan is almost never constant the optimal marginal tax rates on capital and labor income vary with age conversely the progressivity imbedded in the u s tax code implies that marginal tax rates vary with age because tax rates vary with earnings and earnings vary with age using numerical simulations this paper shows that if the tax authority is prevented from conditioning tax rates on age some degree of progressivity is desirable as progressive taxation better imitates optimal age dependent taxes than an optimal age independent tax system this role for progressive taxation emanates from efficiency reasons and does not rely on any insurance nor re distribution arguments

on the optimal taxation of capital income abstract we show that in models in which labor services are supplied jointly with human capital the chamley and judd result on zero capital income taxation in the limit extends to labor taxes as long as accumulation technologies are constant returns to scale moreover for a class of widely used preferences consumption taxes are zero in the limit as well however we show by the construction of two examples that these results no longer hold for certains types of restrictions on tax rates or if there are profits generated journal of economic literatureclassification numbers e62 h21

an exact solution to a dynamic portfolio choice problem under transactions costs the presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor it requires one to either act or do nothing an issue which of course does not arise in frictionless situations the investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all his objective is to maximize the expected utility derived from that terminal consumption we postpone the terminal point far into the future to obtain a stationary portfolio rule the portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate we show how to calculate them

optimal fiscal policy public capital and the productivity slowdown abstract this paper develops a quantitative theoretical model for the optimal provision of public capital we show that the ratio of public to private capital in the us economy since 1925 evolves in a manner that is broadly consistent with an optimal transition path derived from a simple growth model the model is used to quantify the conditions under which an increase in the stock of public capital is desirable and to investigate the degree to which nonoptimal fiscal policies can account for the us productivity slowdown

creditor protection and credit response to shocks this article studies the relationship between creditor protection and credit responses to macroeconomic shocks using a data set on legal determinants of finance in a panel of data on aggregate credit growth for 79 countries during 1990 2004 it is shown that credit is more responsive to external shocks in countries with weak legal creditor protection and weak enforcement the results are statistically and economically significant and robust to alternative measures of creditor protection to the inclusion of variables that reflect different stages of economic development to the restriction of the sample to only developing economies to the controls for systemic crises to alternative shock measures and to vector autoregressive specifications

should fiscal policy be different in a non competitive framework abstract this paper studies if imperfections in the labor market justify a different fiscal policy we present a dynamic general equilibrium model with a ramsey planner deciding about public spending labor taxes and debt two different labor market setups are considered first we assume a competitive labor market and then we introduce a union with monopoly power both models reach the same conclusion as regards to the cyclical properties of the optimal policy it is not optimal to implement a countercyclical fiscal policy we also find that government spending should be larger under perfect competition these main results arise both under complete and incomplete markets for the debt

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

fiscal policy and asset prices with incomplete markets we study the simultaneous impact of fiscal policy decisions on macroeconomic activity wealth distribution and asset prices we consider a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where government debt and capital are imperfect substitutes increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium while higher capital income tax rates lead to a higher equity premium the crowding out effects on capital and output are much higher than in models where government debt and capital are perfect substitutes which thus ignore households portfolio reallocation decisions the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

measuring the average marginal tax rate from the individual income tax the economic effects of taxation depend on the configuration of marginal tax rates we consider here the appropriate measure of a marginal tax rate for the federal individual income tax which has a graduated rate structure and allows for numerous legal and illegal deductions from total income our conclusion is that the explicit marginal rate from the tax schedule is the right concept for many purposes hence we construct approximately weighted averages of these marginal tax rates for 1916 80 when weighted by adjusted gross income the arithmetic average of marginal tax rates is 5 in 1920 2 in 1930 6 in 1940 20 in 1950 23 in 1960 24 in 1970 and 30 in 1980 we also discuss the dispersion of marginal tax rates as well as the behavior of average tax rates and deductions from taxable income one noteworthy result concerns the fraction of adjusted gross income that accrues to families that face a marginal tax rate of at least 35 this fraction quadruples from 1964 to 1980 this abstract was borrowed from another version of this item

optimal taxation in a limited commitment economy this paper studies optimal ramsey taxation when risk sharing in private insurance markets is imperfect due to limited enforcement in a limited commitment economy there are externalities associated with capital and labor because individuals do not take into account that their labor and saving decisions aect aggregate supply wages

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

optimal fiscal policy in a stochastic growth model although most neoclassical growth models focus on competitive equilibria which are pareto optimal and ignore the role of government recent works by romer 28 29 judd 20 baxter and king s and bizer and judd 7 have shown that government can be introduced into and suboptimal equilibria can be studied in these models as well their studies however are positive analyses of the effects of fiscal policy in competitive equilibria the purpose of this paper is to apply ramsey s 27 theory of optimal taxation to the normative study of fiscal policy in a stocastic growth model ramsey studied a static representative consumer economy with many goods in his formulation a government consumes a fixed amount of these goods which it purchases at market prices and finances by levying flat rate excise taxes prices and quantities are determined in a competitive equilibrium the government is benevolent and its objective is to choose the optimal tax rates to maximize the representative consumer s utility a number of economists among them kydland and prescott 23 barro 3 turnovsky and brock 31 and lucas and stockey 26 have noted that ramsey s formulation can be applied to dynamic economies with uncertainty if one reinterprets the goods in static problems as dated state contingent goods in this framework a fiscal policy is a rule which specifies state contingent tax rates and the amount of public debt issue in each date the optimal fiscal policy is defined as the one which leads to a quantity