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on Financial Development and Growth |
| By: | Philippe Aghion (Harvard University - Department of Economics); Diego Comin (Harvard Business School, Business, Government and the International Economy Unit); Peter Howitt (Brown University - Department of Economics); Isabel Tecu (Brown University - Department of Economics) |
| Abstract: | Can a country grow faster by saving more? We address this question both theoretically and empirically. In our theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic saving matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic saving does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries. The same result is found when the regression is run on data generated by a calibrated version of our theoretical model. |
| Keywords: | Savings, growth, technology adoption, TFP, FDI |
| JEL: | E2 O2 O3 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:09-080&r=fdg |
| By: | Arnaud Bourgain; Patrice Pieretti; Jens Høj |
| Abstract: | The financial sector has emerged as the main economic engine over the past two decades. The comparative advantages of placing financial activities in Luxembourg have mostly been in terms of an adaptive legislative and regulatory framework and low taxation. As a result, Luxembourg is today one of the main international centres for investment funds. Besides the sector’s direct and indirect employment effects, the most important effect is the large tax revenue generating capacity of the sector, accounting directly for over 20% of aggregate tax revenues. On the other hand, these tax revenues are volatile as the sector is highly sensitive to developments in international financial markets. Indeed, past downturns in international financial markets have tended to lead to a sharp slowdown of growth in the economy as well as in revenues, pointing to potential large risks associated with the current turmoil in international financial markets. Besides these short-term considerations, a lower trend growth rate of the sector is likely over the medium term. The main activities of the sector are in middle and back offices dealing with financial administration which, with new IT technologies, will tend to be increasingly outsourced. At the same time, the sector is having problems in attracting highly specialised talent to enter higher value front office activities. Over the longer term, international competition will continue to exert pressures that may eventually erode Luxembourg’s position. The extent of the decline in the sector’s trend growth depends on the ability to maintain and expand the attractiveness of investing and working in Luxembourg. Achieving this will depend on being able to adjust tax, infrastructure, and housing policies to attract foreign talent while updating and increasing the transparency of financial sector regulation. |
| Keywords: | public finances, financial sector, economic growth, Luxembourg |
| JEL: | G15 G18 G21 G24 |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:660-en&r=fdg |
| By: | Elena Andreou (University of Cyprus, Cyprus); Marianne Sensier (The University of Manchester, UK); Alessandra Pelloni (University of Rome ‘Tor Vergata’ and The Rimini Centre of Economic Analisys, Italy) |
| Abstract: | We provide empirical support for a DSGE model with nominal wage stickiness where growth is driven by learning-by-doing and money shocks and their variance are allowed to impact on long-run output growth. In our theoretical model the variance of monetary shocks has a negative effect on growth, while output volatility is good for growth as a positive relationship exists. Utilising a bivariate GARCH-M model we test the empirical conditional mean and variance relationships of nominal money and production growth rates in the G7 countries. We corroborate the theoretical model predictions with evidence from Bonferroni multiple tests across the G7. |
| Keywords: | growth uncertainty, learning-by-doing, monetary uncertainty, multivariate GARCH-in-mean, nominal rigidity. |
| JEL: | C32 E32 O42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:37-08&r=fdg |
| By: | Papagni, Erasmo |
| Abstract: | This paper investigates economic growth under liquidity constraints by taking into account the choices of fertility, human capital and saving. In a model of four overlapping generations, parents are altruistic towards their offspring and finance their education investment. The government provides education subsidies to young adult parents and levies taxes on income of the adult generation. Sensitivity analysis on borrowing limits and tax parameters highlights effects with opposite sign on the main endogenous variables at steady state. A lift in liquidity constraints decreases savings and capital accumulation and this effect is responsible for the ambiguous sign of comparative statics on the rate of fertility and on human capital investment. From model simulation, we derive an inverted U-shaped curve relating the borrowing limit with fertility, education and growth, meaning that financial reforms in the less developed countries have positive effects on the economy in the long-run, even if they raise fertility and reduce savings. Greater government subsidies to human capital investments and lower income taxes have positive effects on savings and fertility. The same parameters present ambiguous effects on education investments and growth. Numerical simulations show that a) human capital investment has an inverted U-shaped relation with income taxes and education subsidies ; b) economic growth decreases with greater income taxes and increases with higher education subsidies. Jel codes: O40, O16, J13, D91. |
| Keywords: | Borrowing constraints; taxation; endogenous population; economic growth |
| JEL: | J13 D91 O16 O40 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12793&r=fdg |
| By: | Barbara Annicchiarico (University of Rome ‘Tor Vergata’. Italy); Luisa Corrado (University of Cambridge, UK and University of Rome ‘Tor Vergata’, Italy); Alessandra Pelloni (University of Rome ‘Tor Vergata’ and The Rimini Centre of Economic Analisys, Italy) |
| Abstract: | We study the relationship between growth and variability in a DSGE model with nominal rigidities and growth driven by learning-by-doing. We show that this relationship may be positive or negative depending on the impulse source of fluctuations A key role is also played by the Frisch elasticity of labour supply and by institutional features of the labour market. Our general findings are that monetary shocks volatility will generally have a negative effect on growth, while the opposite tends to be true for fiscal and productivity shocks. These findings are somehow consistent with the existing empirical evidence: data show, in fact, a somewhat ambiguous relationship between output growth and real variability, but a generally negative relationship between output growth and nominal variability. |
| Keywords: | Growth; Volatility; Monetary and Real Shocks; Labour Supply Elasticity; Second-Order Approximation Methods |
| JEL: | O42 E30 C63 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:32-08&r=fdg |