Empirical Analysis of an Augmented Schumpeterian Endogenous Growth Model

This thesis examines the effects of financing frictions on corporate decisions using dynamic models. Accounting for financing frictions helps reconcile a number of regularities that are hard to explain within the Modigliani-Miller framework. For instance, financing frictions provide incentives for firms to keep liquidity on their balance sheets as a precautionary hedge---a pattern that has been heavily debated in light of the secular increase of cash-to-asset ratios of U.S. firms. The first chapter develops a model that investigates the relation between corporate policies and secondary stock market liquidity. I show that secondary market illiquidity limits a firm's ability to hold precautionary liquidity, exacerbates financial constraints, reduces investment, and decreases firm value. The model reproduces the positive relation between market liquidity and corporate cash holdings observed in the data. This relation might be surprising since firms with illiquid stocks, which have been documented to be more financially constrained than more liquid peers, should be willing to keep more precautionary cash. I also show that the illiquidity-driven drop in firm value can feed back into the secondary market by deterring the participation of liquidity providers, thereby making the market more illiquid. The self-reinforcing nature of this relation gives rise to an internal-external liquidity loop, which singles out a propagation mechanism between financial markets and the corporate sector. From a banking perspective, liquidity hoarding has been a hotly debated topic among academics and policy-makers in the aftermath of the 2007-2009 financial crisis. The second chapter, which is a joint work with Prof. Erwan Morellec and Marco Della Seta, develops a dynamic model of the effects of liability structure and liquid reserves on banks' insolvency risk. When a bank relies on short-term debt financing, negative operating shocks get amplified as the bank weaker fundamentals also translate into losses when rolling over short-term debt. This amplification mechanism leads to an increase in default risk that gets more pronounced as debt maturity decreases and rollover losses increase. Because of this amplification mechanism, banks with identical debt ratios and liquid reserves but different debt structures have different default risk. Heavy exposure to rollover risk can also lead banks to implement gambling strategies when close to default. The third chapter, which is a joint work with Prof. Semyon Malamud, analyzes firms' optimal policies in a general equilibrium setting. It characterizes optimal liquidity management, innovation, and production decisions for a continuum of firms facing financing frictions and the threat of creative destruction. We show that liquidity constraints lead firms to cut production and increase markups, which are then countercyclical with respect to firm-specific shocks. We also illustrate that liquidity constraints may spur firms' investment in innovation and give rise to a non-monotonic cash-investment relation. We embed our single-firm dynamics in a Schumpeterian model of endogenous growth and demonstrate that financing frictions have a non-monotonic effect on economic growth and may increase aggregate consumption. When the corporate sector is constrained, liquidity injections by the government have real effects and can stimulate growth.

Çalışma, finansal gelişme ve büyüme arasındaki ilişkiye, finans piyasaları içinde önemli yere sahip olan bankacılık sektöründeki finansal inovasyonun etkileri üzerinden yoğunlaşmaktadır. Bankalar, küreselleşmenin getirdiği rekabet etkisi ile, teknolojinin gelişmesine paralel olarak teknoloji alt yapılı inovatif ürün ve hizmetlere ağırlık vermek zorunda kalmışlardır. Bu çerçevede çalışma, bankacılık sektöründe finansal inovasyonlar ile Türkiye ekonomisi ve daha ayrıntılı şekilde Türkiye’nin bölgesel ekonomisinin büyümesi arasındaki ilişki ortaya konulmayı amaçlamaktadır. Türkiye ve bölgeler için kullanılan inovasyon değişkenlerinin sayı olarak fazlalığı sebebiyle ve ilgili değişkenleri mümkün olduğunca daha az sayıyla temsil etmek adına Temel Bileşen Analiz (PrincipalComponent Analysis) metodu kullanılarak yeni inovasyon endeksleri oluşturulmuştur. Türkiye için yapılan analizinde 1998-2017 dönemi yıllık verileri kullanılmıştır. Her değişken için Genelleştirilmiş Dickey Fuller Birim Kök testi yapıldıktan sonra ARDL Eşbütünleşme Testi uygulanmıştır. Türkiye’nin bölgeleri için yapılan analizde ise; 2007-2017 dönemi yıllık veriler kullanılarak, dinamik panel veri yöntemlerinden Arellano-Bond GMM birinci farklar tahmin yöntemi, Arellono ve Bover/Blundell ve Bond’un İki Aşamalı Sistem GMM ve Havuzlanmış Veri (Pooled Data) yöntemi uygulanmıştır. Analiz sonuçlarına göre, Türkiye ve Türkiye’nin bazı bölgelerinde bankacılık sektöründe yaşanan teknolojik gelişme, küreselleşme ve bilginin öncülüğünde gelişim gösteren inovasyon temelli ürün ve hizmetler ekonomiye olumlu ve pozitif katkı sunmaktadır. Bu sonuç Schumpeter’in görüşünü ve içsel büyüme teorilerini destekler niteliktedir.

This note reviews a recent book by Siro Lombardini on Growth and Economic Development. The review re-examines old and new theories of growth. In particular, the importance of the recent theoretical models of endogenous growth (aiming at identifying endogenous, as opposed to exogenous, engines of growth) is assessed. The paper also analyses a recent and promising line of research pursued by Siro Lombardini By using the theory of natural evolution and selection, Lombardini enlarges Schumpeter's theory of economic development and shows how innovation can account for growth.

This paper examines the implications of a monetary human capital investment endogenous growth model for aggregate economic fluctuations. In addition, an exogenous growth model with a similar human capital investment specification is included in the analysis to compare the business cycle properties of the endogenous growth model with that of the exogenous growth model. The money introduced into the models allows for the liquidity effects. It is found that both the endogenous and exogenous human capital investment growth models are able to capture the business cycle properties of U.S. data closely. Some sensitivity analysis results are provided. The theory predicts that the stochastic properties of the human capital shocks affect the ability of the models to generate the business cycle facts.

While in exogenous growth models demographic variables are linked to economic prosperity mainly via the population size, the structure of the workforce, and the capital intensity of workers, endogenous growth models and their successors also allow for interrelationships between demographic variables and technological change. However, most of the existing literature considers only the interrelationships based on population size and its growth rate and does not explicitly account for population aging. The aim of this paper is (a) to review the role of population size and population growth in the most commonly used endogenous economic growth models, (b) discuss models that also allow for population aging, and (c) sketch out the policy implications of the most commonly used endogenous growth models and compare them to each other.

This North–South model of Schumpeterian endogenous growth combines a market, productivity and knowledge effect. Depending upon the interaction of these effects, various convergent and divergent South–North growth paths occur: for example, full or partial convergence of the Southern technology level to the Northern one, conditional convergence or divergence depending upon the Southern initial technology level and absorptive capacity, higher or lower as well as decreasing or increasing growth rates during the phase of catching up, and equal or higher growth rates of the South compared to the North after catching up. This set of growth paths can better explain the diversity of the empirical observations for economies at different income and technology levels than those generated by existing models. In this new model, convergence based on North–South trade and associated flows of patents (innovations) is guaranteed if the knowledge effect dominates the productivity effect. A larger Southern market expands the area of convergence and can prevent divergence. Not only a larger Southern market, but also a higher Southern steady state growth rate benefit the North so that convergence is desirable for both, the South and the North.

By constructing an endogenous growth model, this paper reveals the inner path of its development based on the rural cultural and creative economy. Secondly, by rationally allocating social resources and combining physical capital and cultural and creative capital, the inter-period optimization of consumption utility can be realized to the greatest extent. Finally, the endogenous economic growth model analyzes the economic effects of GDP and the H-village cultural creative tourism model in Guizhou Province. The results show that the correlation coefficient of the endogenous growth model of rural cultural creativity and economic development is R=0.979. The goodness of fit is R 2 = 0.967, and the adjusted goodness of fit is R 2 = 0.983, which indicates that the degree of proximity of the fitted equations to reality is extremely high. This paper provides the theoretical basis and practical guidance for developing a rural cultural and creative economy, which is of great significance for promoting the sustainable development of the regional economy.

The Arrow-Romer growth model helped to overcome the main drawback of the Solow-Swan model, where technical change is created exogenously, not by the firms making decisions, and formulated the conditions for endogenous growth in an economy. Nonetheless, the presentation of the Arrow-Romer model and corresponding empirical studies by the Cobb-Douglas functions hides the role of the capital-labor relationship for economic growth. A constant elasticity of substitution (CES) function, constructed by Arrow et al. (1961), allows solving this problem. So, the purpose of the current research is to test the endogenous growth of the Vietnamese economy, which has experienced a more than 30-year market-oriented reform through specifying an aggregate CES function. By applying Bayesian nonlinear regression, the research results revealed the elasticity of factor substitution (ES) lower than one. This work theoretically and empirically contributes to the endogenous growth theory in problems concerned with emerging economies. Investments in physical and human capital and technological progress are the determinants of endogenous growth. From the findings obtained, the author concludes that even though having achieved a rather impressive growth rate over more than three decades, the Vietnamese economy has not yet generated the possibility of endogenous growth, and suggests that endogenous growth can be hardly generated in emerging economies like Vietnam if important growth policies related to accumulation of physical and human capital as well as enhancement of R&D activities are not simultaneously implemented. It is indispensable to focus on substantially improving institutional quality.

Darwin Meets Schumpeter: Natural Selection Types and Environmental Changes in an Endogenous Growth Model

This paper investigates the role of monetary policy in economic growth. Using an infinitely lived overlapping-generations model with a simple convex technology that can yield endo- genous growth, we show that money supply behaviour of the government may have significant effects on the long-run economic growth. In addition to the effect on the long-term growth rate of the economy, the policy may determine whether the economy stays in the exogenous growth process restricted by the growth rate of labour supply, or realizes the endogenous growth that sustains continuous growth of pep capita income and consumption. effect of inflation on capital accumulation has been one of the central topics in macroeconomics. Using an ad hoc model, Tobin shows that a rise in the rate of inflation deepens capital formation, whereas Sidrauski presents an opti- mizing model in which money is superneutral; that is, inflation has no effect on capital formation in the long run. These studies have been extended by a number of studies such as Dornbusch and Frenkel (1973) and Wang and Yip (1992). However, the concern of these studies is restricted to the analysis of the level effect of inflation on capital accumulation. Recent developments in endogenous growth theory present a useful analytical framework for re-examin- ing the effect of inflation on capital accumulation and economic growth. In contrast to the strong emphasis on the importance of fiscal policy for long-run economic growth seen in Mino (1989), Barro (1990) and King and Rebelo (1990), the role of monetary policy has been mostly ignored in the endogenous growth literature. Recalling that the effect of money growth on capital formation has been the central issue in money and growth literature, it is rather curious that recent studies on endogenous economic growth focus exclusively on the real side of the economy. There is, however, a small number of authors investigating the role of money in endogenously growing economies. Marquis and Reffet (1991) and Mino (1991) introduce money into two-sector models involving human capital accumulation via a cash-in-advance constraint. They conclude that an increase in the rate of nominal money supply (generally) depresses the long-term economic growth, as long as the cash-in-advance con- straint applies to investment demand for either physical or human capital.' Wang and Yip (1991) extend the Uzawa-Lucas model of endogenous growth by assuming that households allocate their available time between production, transaction and human capital formation. The transaction time is assumed to be a decreasing function of real-money balances, and therefore a reduction in real balances arising from an increase in the monetary expansion rate increases c? The London School of Economics and Political Science 1995

A study of the impact of military expenditures on economic growth and development examines the differences in the results of previous studies which led to contradictory conclusions. The authors find that these differences are due to sample variations, specificational choices, and the different time periods examined. The data indicate that there is no consistent, statistically significant connection between military spending and economic growth. Augmentation of the models suggests that military expenditures neither help nor hurt economic growth to any significant extent. 2 tables.

Money, random matching and endogenous growth: A quantitative analysis

The key feature of endogenous growth models is that they imply that perrnanent changes in government policy can have permanent effects on growth rates. In this paper we develop and implement an empirical framework to test this implication. In a regression of growth rates on current and lagged policy variables the sum of the slope coefficients for each policy variable should be nonzero (zero) for endogenous (exogenous) growth models. In our estimation we use time series data spanning up to 100 years for the United States and 160 years for the United Kingdom. We find that the implication for exogenous growth is usually rejected when both a tax variable and a public capital variable are included in the regression; failing to include both variables biases the results in favor of exogenous growth models. Our findings show that it is possible to have endogenous growth even when U.S. and U.K. GDP growth rates appear to be stable over time. We conclude that at the aggregate level, the production function appears to exhibit constant returns to scale in reproducible inputs.

This paper presents evidence supporting endogenous growth models that emphasize public structural capital. The authors apply a simple test of endogenous vs. exogenous growth models. In exogenous growth economies temporary innovations to policy variables lead only to temporary changes in GNP levels, while in endogenous growth economies the innovations can lead to permanent changes in GNP levels. Of the seven U.S. policy variables they examine, only non-military equipment capital and non-military structural capital have a statistically and economically significant effect upon long-run GNP levels. Further estimation suggests that the non-military equipment capital result is not robust and that several disaggregate components of structural capital contribute significantly. Copyright 1996 by MIT Press.

The present thesis develops a formal model of endogenous growth that incorporates costly knowledge codification as a means of intergenerational knowledge transfer. It identifies the circumstances under which knowledge codification takes place in the long run and studies its effects on long run economic development. The motivation for this work is that knowledge codification is central to utilize the non-rivalry of ideas for economic growth. However, while the usual models of economic growth treat knowledge codification as a by-product of R&D-activities and as costless, one can observe great efforts by private firms for the purposeful codification of knowledge. The first of the thesis' three parts presents a formalization of knowledge codification within a two-sector overlapping generations framework of endogenous economic growth. Although knowledge codification positively influences an economy's long-run output level respectively its long-run growth rate of output, it turns out that initially there will be no knowledge codification in an economy that develops from a small level of capital. Using two different specifications of the research process, we examine under which conditions an economy will codify in the long run. The second part of the thesis elaborates on the robustness of the results obtained from the basic model. Different aspects such as the assumption of Solow-neutral technical progress are discussed and the general properties of the model that drive the main results are identified. The last part of the dissertation starts with a discussion of the relation of the model introduced in the thesis to standard endogenous growth theory. Romer's model of endogenous technological change has been chosen for a comparison. Thereafter, welfare aspects of the market equilibrium in the growth model with costly knowledge codification are illuminated. The focus of these considerations is the identification of potential social inefficiencies of the market solution and the question as to whether it is possible to engineer Pareto-improvements.