Abstract
The core of Shapley–Shubik games and general equilibrium models with a Venn diagram is applied for a theory on the role of real finance in economic growth among advanced economies. Then the dynamic computable general equilibrium (DCGE) models for Germany, France, the UK, Japan and the USA are constructed to assess the validity of the over-financing hypothesis that has reappeared after the financial crisis of 2008. Actual financial deepening ratios observed in the nonconsolidated balance sheet of the OECD exceeded by factors of 3.5, 2.4, 5.1, 11.6 and 4.8 than the optimal financial deepening ratios implied by DCGE models, respectively, in these countries because of excessive leveraging and bubbles up to 19 times of GDP which were responsible for this great recession. Containing such massive fluctuations for macroeconomic stability and growth in these economies are not possible in conventional fiscal and monetary policy models and require a DCGE analysis like this along with adoption of separating equilibrium strategy in line of Miller–Stiglitz–Roth mechanisms to avoid problem of asymmetric information in the process of financial intermediation so that the gaps between actual and optimal ratios of financial deepening remain as small as possible.
Highlights
The core of Shapley-Shubik games and general equilibrium models with a Venn diagram is applied for a theory on the role of real ...nance in economic growth among advanced economies
It is pertinent to present the generic structure of a dynamic general equilibrium model here and to apply it to the ...ve advanced economies selected for this study with a focus on the optimal ...nancial deepening ratios emerging from the optimising behavior of consumers and producers in these economies
The dynamic computable general equilibrium (DCGE) model constructed to assess the prospects of ...nancial development in ...ve economies consisted of eleven sectors of goods and services, capital assets di¤erentiated by sectors and labour di¤erentiated by skills
Summary
A good ...nancial system channels savings into investment, allows intertemporal optimisation by individuals and ...rms, spreads risk among people and is a factor for an e¢ cient dynamic economy. Levine and Loayza (2000), Carlin and Mayer (2003) and Allena, Vayanos and Vives (2014) survey the literature relating to the liberalisation of ...nancial sector and associated problems including those of saving and loan associations in 1980 in the US, bank runs and failures of giant banks in Japan in 1990s or the collapse of credit and housing markets in the US and several EU economies recently including the credit crunch, bank failures, liquidity crises, stock market crash and bailouts in UK, EU and US after the crisis in October, 2008. Conclusions, references and appendices supporting the study are in the ...nal section
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