Long-run Output Research Articles

Firm Beliefs and Long-Run Demand Effects in a Labor-Constrained Model of Growth and Distribution

One of the most debated questions in alternative macroeconomics regards whether demand policies have permanent or merely transitory effects. While Kaleckian ecoomists have argued that demand matters even in the long run, both economists operating within other Keynesian traditions (e.g. Skott, 1989) as well as Classical economists argue that in the long-run output growth is constrained by the so-called natural rate. This paper attempts to bridge the gap by analyzing the role of firm beliefs about the state of the economy in a labor-constrained growth and distribution model based on Kaldor (1956) and Goodwin (1967) but featuring an explicitly dynamic choice of capacity utilization. We show that: (i) the relevance of such beliefs generates an inefficiently low utilization rate and labor share in equilibrium; but (ii) the efficient utilization rate can be implemented through fiscal policy. Under exogenous technical change, (iii) the inefficiency does not affect the equilibrium employment rate and growth rate, but expansionary fiscal policy has positive level effects on both GDP and the labor share. However, (iv) with endogenous technical change a la Verdoorn (1949), fiscal policy has also temporary growth effects. Finally, (v) the fact that the choice of utilization responds to income shares has a stabilizing effect on growth cycles, even under exogenous technical change, that is analogous to factor substitution.

The impact of productive and non-productive government expenditure on economic growth: an empirical analysis in high-income versus low- to middle-income economies

This paper examines the relationship between the compositions of government expenditure and economic growth. It develops an endogenous growth framework drawing on variables from existing models, and separates government expenditure into productive and non-productive forms. Using panel data from 37 high-income and 22 low- to middle-income countries covering 1993–2012, our findings are based on OLS fixed effects and GMM techniques. We challenge much of the existing empirical literature in relation to developing economies by showing that a shift in government expenditure away from non-productive government expenditure and towards productive forms of expenditure are associated with higher levels of growth in both high-income and low- to middle-income economies. Moreover, we identify the differing components of government expenditure that are most associated with increased long-run output levels in both high-income and low- to middle-income economies.

Inequality, Redistribution, and Growth in Developed Countries

Abstract This paper examines the effect of inequality and redistribution on growth in a panel of developed OECD countries with dynamic fixed effects (DFE) estimates. It is found out that redistribution is neutral to growth while disposable inequality is weakly positive for long-run aggregate output. Population growth is also a determinant of aggregate output. On the other hand, the analysis does not find evidence of a significant effect of both inequality and redistribution in the short-run as well as of top and bottom inequality. The analysis suggests that in economies that are more unequal a win-win process to increase equality and growth through redistributive taxes is likely to be effective, even if the overall effect is low and time demanding. JEL classifications: O11, O15, O47, E62, H23 Keywords: Inequality, Redistribution, Growth

The long-run relationship between public consumption and output in developing countries: Evidence from panel data

This paper uses heterogeneous panel cointegration techniques to examine the long-run effect of public consumption on output for 33 low- and lower-middle-income developing countries from 1972 to 2014. We include total investment in the cointegration relation and explicitly deal with cross-sectional dependence in the data that arises due to unobserved common factors. We find that on average, government consumption has a negative impact on output in the long-run — a result driven by non-sub-Saharan African countries in our sample. In contrast, investment has a consistent positive effect on output. The results suggest that fiscal adjustments that cut government consumption while maintaining investment spending will have a potential expansionary effect on long-run output.

Transportation and economic growth in China: A heterogeneous panel cointegration and causality analysis

This study analyzes the cointegration and causal relationship between transportation and economic growth in the eastern, central and western regions of China using provincial data from 2000 to 2015. Accounting for cross-section dependence and heterogeneity among provinces, a long-run equilibrium relationship is established between freight transportation and economic growth in all three regions. Specifically, the long-run output elasticity coefficient for freight transportation ranges between 0.35 and 0.89 among the three regions, with the highest economic impact in the central region. In addition, a bidirectional Granger causal relationship is identified between freight transportation and economic growth in the less developed central and western regions, while freight transportation leads economic growth in the more affluent eastern region but not the reverse. When considering modes of freight transportations, highways are found to be cointegrated with economic growth, with a long run impact ranging from 0.37 to 0.67 among the three regions. Also, the causality between highway freight and economic growth follows the relationship between overall freight transportation and economy in all three regions; whereas rail freight do not cause economic growth in any of the three regions. Our findings imply that highway freight has become the dominant mode of transportation in terms of supporting regional economic growth. In addition, spatial diversity in economic activity should be taken into consideration in planning regional transportation system in China.

Public debt and economic growth: what do neoclassical growth models teach us?

ABSTRACTThis paper aims to quantify the crowding-out effect of public debt and the related loss in long-run output in neoclassical growth models. To accomplish this task, we incorporate the government sector into the Ramsey–Cass–Koopmans (RCK) model, the Blanchard model and the Solow model, which differ only in their assumptions concerning the consumption behaviour of households. We also introduce a general framework that is capable of gauging the burden of public debt in a neoclassical world in the case of any type of consumption behaviour. Our results are threefold. First, contrary to the RCK model, public debt reduces long-run output in the Blanchard model and the Solow model, although to a different extent: the crowding-out effect is marginal in the former, whereas it can be very large in the latter. Second, the burden of public debt is country-specific depending crucially on the saving rate and the population growth rate. Finally, in developed countries the upper limit of the output loss related to public debt is moderate at best even if distortionary taxes are taken into account.

An ARDL Bounds Testing Approach to the Relationship between Financial Development and Output Growth in Nepal

This paper examines the relationship between financial development and output growth in Nepal over 42 years of period from mid- July 1975 to 2017 using ARDL bounds testing approach to co-integration. The study uses natural logarithm of per capita real GDP as a proxy of output growth and means removal average of broad money (M2) to GDP ratio and domestic private credit to GDP ratio as a proxy of financial development indicator. The results of ARDL bounds test show that financial development and output growth in Nepal is co-integrated over the study period. The study results demonstrate that financial development in Nepal leads to output growth in the long-run. However, the study fails to detect any impact of financial development on output growth in Nepal over the short-run. Based on long run results of this study, it can be concluded that development of financial sector in Nepal can stimulate long-run output growth. Thus, considerable efforts should be paid on promoting the development of the financial sector that contributes significantly to achieve long-run output growth.

Measuring US Aggregate Output and Output Gap Using Large Datasets

We propose a new measure of the output gap based on a dynamic factor model that is estimated on a large number of U.S. macroeconomic indicators and which incorporates relevant stylized facts about macroeconomic data (co-movements, non-stationarity, and the slow drift in long-run output growth over time). We find that, (1) from the mid-1990s to 2008, the U.S. economy operated above its potential; and, (2) in 2018:Q4, the labor market was tighter than the market for goods and services. Because it is mainly data driven, our measure is a natural complementary tool to the theoretical models used at policy institutions.

CORDIC-Based VLSI Architectures of Running DFT with Refreshing Mechanism

Running discrete Fourier transform (running DFT) is being used to overcome the drawbacks of ping pong buffer technique by employing fast Fourier transform (FFT) for real time spectrum analyzer, However, the major drawback of existing MAC or CORDIC (CO-ordinate Rotational DIgital Computer) based computation of running DFT is error accumulation due to finite precision machine and iterative computation which deteriorate the output in long run. Hence, two new alternative CORDIC based architectures with trade-off area and throughput for the computation of running DFT with refreshing mechanism are proposed in this paper to circumvent the problem of error accumulation. The novelty of these two proposed architectures is low hardware complexity or high throughput and provides the spectrum updates on sample-by-sample basis within tolerable error limit. The proposed designs are implemented using verilogHDL and synthesized using commercially available 0.18μ m CMOS technology to estimate its computation performances. The first order hardware complexities of these proposed architectures are compared with existing architectures. The proposed designs in this paper have potential applications for continuous monitoring of Fourier spectrum in the domain of power spectrum analysis, biomedical signal monitoring systems and communication system.

The dynamics of ICT, foreign direct investment, globalization and economic growth: Panel estimation robust to heterogeneity and cross-sectional dependence

In the modern era of globalization, information and communication technology (ICT) are considered key sectors that profoundly contribute to economic growth. Most of the economic activities, trade, and foreign direct investment are mainly dependent on modern sources of ICT. The objective of present research work is to investigate the dynamic relationship between ICT, foreign direct investment (FDI), economic growth incorporating trade and globalization for BRICS economies over 2000–2014 by employing OLS with fixed effects, the FMOLS, the DOLS and the group-mean estimator techniques robust to heterogeneity and cross-sectional dependence. Empirical results of the study suggest the long-run elasticities between ICT and economic growth, which suggests that ICT positively contributes to economic growth. Findings from long-run output elasticities show that both FDI and globalization have a long-run effect on economic growth. Furthermore, bi-directional causality exists between GDP and FDI, globalization and economic growth, and trade and economic growth. Also, unidirectional causality is running from globalization to trade. Globalization and ICT also Granger causes each other. Sensitivity analysis is employed to check whether findings of the study are valid and reliable for policy recommendation. The outcome of our study suggests policy recommendations for improving ICT with the focus on economic growth, trade openness and facilitation of foreign investment in BRICS countries.

The Expectations-driven US Current Account

During the 1990s and 2000s, survey expectations of long-run output growth for the U.S. relative to the rest of the world were highly correlated with the U.S. current account, and thus, with global imbalances. We show that this finding is, to a large extent, predicted by a two-region stochastic growth model simulated using expected trend growth based on surveys. In line with the intertemporal approach to the current account, a major part of the buildup and subsequent reversal of the U.S. current account de.cit appears to be consistent with an optimal response of households and firms to changing growth prospects. This article is protected by copyright. All rights reserved.

Tracking the Slowdown in Long-Run GDP Growth

Using a dynamic factor model that allows for changes in both the long-run growth rate of output and the volatility of business cycles, we document a significant decline in long-run output growth in the United States. Our evidence supports the view that most of this slowdown occurred prior to the Great Recession. We show how to use the model to decompose changes in long-run growth into its underlying drivers. At low frequencies, a decline in the growth rate of labor productivity appears to be behind the recent slowdown in GDP growth for both the United States and other advanced economies. When applied to real-time data, the proposed model is capable of detecting shifts in long-run growth in a timely and reliable manner.

Bank capital, the state contingency of banks’ assets and its role for the transmission of shocks

I show how the evolution of bank capital depends on the share of non-state-contingent assets in banks’ balance sheets and present the implications for macroeconomic dynamics. State-contingent securities impact on banks’ balance sheets through changes in their returns (and their prices), both of which depend on the current state of the economy. Non-state-contingent assets are signed before shocks are realized and their repayment is guaranteed. For this reason, they insulate banks’ balance sheets from recent economic activity in the absence of defaults. Non-state-contingent assets in banks’ balance sheets attenuate the amplification of shocks resulting from financial frictions. The same effect can be achieved if more weight is placed on the state-contingent assets in the equity related constraint against the costs of long-run output losses.

Macroprudential Policy, Incomplete Information and Inequality: The Case of Low-Income and Developing Countries

In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policymakers have noisy and lagged data, as commonly observed in low income and developing countries (LIDCs). The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policymaker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost. The results therefore point to the need for a more careful consideration toward the passive policy, which is usually advocated for LIDCs.

Macroprudential Policy, Incomplete Information and Inequality: The case of Low-Income and Developing Countries

In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policymakers have noisy and lagged data, as commonly observed in lowincome and developing countries (LIDCs). The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policymaker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost. The results therefore point to the need for a more careful consideration toward the passive policy, which is usually advocated for LIDCs.

Renewable energy consumption-economic growth nexus in E-7 countries

ABSTRACTThis study investigates the long-run relationship between renewable energy consumption and economic growth for E-7 countries over the period 1992–2012 by heterogeneous panel data analysis techniques. Heterogeneous panel cointegration test results confirm the existence of a long-run relationship among real gross domestic product (GDP), renewable energy consumption, real gross fixed capital formation, and labor force. According to the long-run output elasticities, renewable energy consumption has a positive impact on real GDP in E-7 countries. In this study, long-run output elasticities of each country are also estimated by time series analysis techniques. Empirical findings reveal the heterogeneity across countries.

The Burden of Public Debt in Neoclassical Growth Models: Do We Have to Worry About it?

This paper investigates the crowding-out effect of public debt and the related loss in the long-run output in the framework of neoclassical growth models. To accomplish this task, we incorporate the government sector into three basic neoclassical models, which differ only in their assumptions about the consumption behavior of households. First, we consider the crowding-out effect of public debt in the Ramsey-Cass-Koopmans (RCK) model with dynamic optimization and the altruistic intergenerational links of households. Then, we drop the assumption of intergenerational links in the Blanchard (1985) model and later the assumption of dynamic optimization as well in the Solow model. Our results show that, contrary to the RCK model, public debt reduces long-run output in the Blanchard model and the Solow model, although to a different extent: the crowding-out effect is marginal in the former, whereas it can be very large in the latter depending on the households’ saving rate and the population growth rate. However, we demonstrate that under the conditions of developed countries, even the upper limit of the output loss triggered by public debt is moderate at best. This conclusion holds even if the output loss resulting from distortionary taxes is taken into account. Our main policy contribution is that according to the neoclassical growth models, the long-run burden of public debt around the current 90 percent average debt-to-GDP ratio seems to be of minor importance in the Eurozone.

The Economy-Wide Gains from Resolving Debt Overhang

What are the gains from resolving debt overhang for firm growth and macroeconomic aggregates? This paper addresses this question through the lens of a general equilibrium model of firm dynamics and endogenous innovation in which debt overhang affects the firm innovation decision and, thus, firm expected subsequent growth. The estimated model implies that while the private gains to a firm from resolving debt overhang can be large if it faces sufficient default risk, the expected gains to firms on average are relatively modest. The social gains to long-run output from resolving debt overhang are smaller, as changes in prices and the aggregate bankruptcy rate act as dampening forces. However, the estimated model suggests the gains from resolving debt overhang over the business cycle can be large, as firm default risk rises significantly during the recession, which implies a significant decrease in firm innovation and subsequent firm growth.

Natural gas, trade and sustainable growth: empirical evidence from the top gas consumers of the developing world

ABSTRACTNatural gas is the key non-renewable source of energy for a low-carbon economy. The research applies heterogeneous panel techniques to investigate the impact of natural gas consumption on economic growth across a panel of top 15 natural gas consumers of the developing world. We establish long-run dynamics with cross-sectional dependence and heterogeneity across the sample countries. The long-run output elasticities suggest that the natural gas consumption and trade variables have significant positive effect on the output in a panel of developing economies. Further, we establish feedback relationship among gas consumption, output and trade in the short-run. Given the significance of natural gas as the low-emission source of energy, we suggest governments and policy advisers of these major natural gas consumers to focus on developing pipeline infrastructure for adequate supply, reforming natural gas sector with a competitive price structure to combat excess demand in individual natural gas market. With trade integration, majority of these countries need to incorporate these initiatives to improve the technologies such as combined cycle power plant technology and value-added chemical production technology to achieve sustainable economic growth.

Does human capital contribute to economic growth in Mauritius?

Purpose Real gross domestic product (GDP) growth for Mauritius has averaged more than 5 per cent since 1970 and GDP per capita has increased more than tenfold between 1970 and 2012, from less than $500 to more than $9,000. It has often been reported that human capital, along with other growth enablers, has played an important role in this development. The purpose of this paper is to study this nexus. Design/methodology/approach A human capital augmented Cobb-Douglas production function is used, where output is also a function of capital and labour. One of the innovations of the present paper is the use of a composite index to proxy human capital. The authors investigate the impact of human capital on economic growth in a dynamic vector error correction modelling (VECM) framework. Findings The general results here show that stock, labour and human capital are all significant growth determinants, with human capital having a long-run output elasticity of 0.36. The VECM results generally validated the long-run output elasticity, although a relatively lower elasticity of 0.1 is obtained. Both sets of results tend to point to the fact that human capital has significantly contributed to economic growth in Mauritius. Research limitations/implications The current paper paves the way for future work, which can build on the composite HCI developed here and aggregate it with relevant variables representing tertiary education and training, to better analyze and further understand the role of human capital on economic growth in Mauritius. Originality/value Here, the authors posit that human capital is an aggregate of health, education and nutrition, and the authors use a composite index along with other contributing factors to study its impact on economic growth, within a VECM framework.