Long-run Output Research Articles

Финансовая репрессия и эффективность финансового рынка в модели общего равновесия

Being a source of budget revenues, financial repression discourages investment and overall economic activity. Apart from its direct impact on economy, financial repression can adversely influence financial sector efficiency. Such policy can discourage the financial sector’s development by reducing its profits. This study proposes an approach to account for this fact in a DSGE model. In this model the role of the financial sector lies in overcoming the information asymmetry problem between lenders and borrowers. By investing in monitoring technology development, the financial sector can increase its efficiency and reduce the external finance premium. However, the financial sector’s incentives to invest depend on market characteristics; thus, an indirect effect of financial repression emerges. The model is calibrated for the US economy. A permanent increase of financial repression revenues significantly reduces the long-run output. Almost a half of reduction in output comes from discouraging financial sector investments in monitoring. The reason is that financial repression makes investments in monitoring less beneficial by reducing the size of the corporate credit market. Temporary financial repression tightening does not have such a substantial impact on economic activity. Moreover, in this case the financial sector efficiency channel is negligible in a linearized DSGE model. A comparison of financial repression multipliers with those of distortionary taxes demonstrates that the former are the lowest during the first quarters after the shock. If a longer time period is taken into account, financial repression can be a comparatively efficient source of a temporary budget revenues increase if the ratio of government debt to capital is not too high.

The Dynamic Effects of Renewable Energy on Economic Growth : The Case of China


 
 
 This paper estimates the possible effects of renewable energy consumption on the economic growth of the major renewable energy- consuming country in the world. The country has taken the lead in renewable energy in the past decade, so the paper chooses the top renewable energy-consuming country China to explain the growth process between 1990 and 2019. Using time-series analysis techniques, this study Estimation and testing result from the different cointegration methods in the context of China. The results confirm the evidence of long-run dynamics between economic growth, and traditional and energy-related inputs. Findings from long-run output elasticities indicate that renewable energy consumption has a significant positive impact on economic output. The findings suggest that governments, energy planners, international cooperation agencies and associated bodies must act together in increasing renewable energy investment for low carbon growth in most of these economies.
 
 

Endogenous growth, firm heterogeneity and the long-run impact of financial crises

How does firm heterogeneity affect the long-run consequences of financial crises? To answer this question, I introduce aggregate shocks and differences in the innovative potential of firms into a Schumpeterian endogenous growth model. Firm heterogeneity amplifies the effects of a financial crisis on aggregate innovation, because small firms are both relatively more innovative than large firms and hit harder by the crisis. A calibration using manufacturing data from Spain shows that a representative-firm model which ignores these mechanisms underestimates the long-run output losses due to the 2008-2013 crisis by around 40%.

The Impact of Aging and Automation on the Macroeconomy and Inequality

We build a life-cycle model in which a representative firm produces a final good using routine and non-routine labor as well as traditional and automation capital (e.g. robots). Robots can substitute for routine labor. We show that both, population aging and higher robot productivity, foster the increased use of robotics. Population aging decreases and progress in robot technology increases long-run output per capita. In both cases, inequalities in labor income, wealth and consumption rise. Although expected advances in automation technologies are able to mitigate or even circumvent output losses in the aggregate and improve consumption possibilities for everyone, this comes at the cost of increased inequality because non-routine workers benefit disproportionately.

Euro Housing Market Co-Movement: Medium vs. Short-Term Cycles

A lack of co-movement among the national housing markets in the euro monetary union makes the job of the ECB difficult. If markets are depressed in some countries, while booming in others, the ECB would be unable to create simultaneous loose and tight monetary conditions tailored to each national situation. Co-movement across national housing markets has thus been a topic of several previous studies. Most of these papers focused on business-cycle frequency dynamics. Medium term cycles, however, have been shown to play a more important role for long-run output and the financial cycle than short-term fluctuations. We examine both business cycle and medium-term components of housing in eight euro nations. We find that the medium cycle is more volatile than the business cycle component in all markets. This indicates the medium cycle plays a more important role for housing in the long-run than short-term fluctuations. We find, however, that there is greater co-movement among the medium cycles of different national housing markets than between the short-term fluctuations. We also find that co-movement of short-term cycles did appear to spike subsequent to the euro’s adoption, but that this greater apparent integration did not persist, and short-term co-movement has fallen in recent years. Finally, although medium-term co-movement is for most countries higher than that of the business cycle frequency, this greater synchronization does not appear to be a function of the euro common currency itself.

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 demand matters in the long run in (neo-) Kaleckian economics, both economists operating within other Keynesian traditions (e.g. Skott 1989) as well as Classical economists Dumenil and Levy (Manchester School 67(6):684–716, 1999) argue that in the long-run output growth is constrained by an exogenous natural growth 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 (Review of Economic Studies 23(2):83–100, 1956) and Goodwin (Journal of Evolutionary Economics 1(1):29–47, 1991) that is also compatible with the evolutionary perspective on coordination (or the lack thereof) within markets by Metcalfe et al. (Cambridge Journal of Economics 30:7–32, 2006). The main innovation is the inclusion of beliefs about economic activity in an explicitly dynamic choice of capacity utilization at the firm level. 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.

Consumption smoothing and housing capital gains: evidence from Australia, Canada, and New Zealand

ABSTRACT Using regional level panel data of three developed countries, comprising Australia, Canada, and New Zealand, the study investigates the response of consumption smoothing to housing capital gains. The consumption smoothing model first revisits the theory of perfect risk sharing. After rejecting a full consumption smoothing hypothesis, the results strongly indicate that the appreciation of house values smooths consumption further. For the sake of comparison, analysing three developed economies reveals the diversification in the response of consumption to long-run output shocks. Canadian residents appear to be more sensitive to permanent domestic output shocks while Australian’s consumption pattern remains unchanged.

A Fisherian approach to financial crises: Lessons from the Sudden Stops literature

Sudden Stops are financial crises defined by a large, sudden current-account reversal. They occur in both advanced and emerging economies and result in deep recessions, collapsing asset prices, and real exchange-rate depreciations. They are preceded by economic expansions, current-account deficits, credit booms, and appreciated asset prices and real exchange rates. Fisherian models (i.e. models with credit constraints linked to market prices) explain these stylized facts as an outcome of Irving Fisher's debt-deflation mechanism. On the normative side, these models feature a pecuniary externality that provides a foundation for macroprudential policy (MPP). We review the stylized facts of Sudden Stops, the evidence on MPP use and effectiveness, and the findings of the literature on Fisherian models. Quantitatively, Fisherian amplification is strong and optimal MPP reduces sharply the size and frequency of crises, but it is also complex and potentially time-inconsistent, and simple MPP rules are less effective. We also provide a new MPP analysis incorporating investment. Using a constant debt-tax policy, we construct a crisis probability-output frontier showing that there is a tradeoff between financial stability and long-run output (i.e., reducing the probability of crises reduces long-run output).

Long-run Association Between Bank Credit and Output: A Study on Districts’ Panel of West Bengal, India

In a globalized world, the financial sectors and the real sectors are interlinked. Although it is a common phenomenon to a developed economy in its national as well as provincial levels, it has hardly been tested for the low-income countries like India. It is further difficult to have such linkage effects at the provinces and district levels. This article aims to examine whether per capita commercial bank credit and per capita net district domestic product for the districts of West Bengal state in India have long-run associations for the period 1993–2014 in a panel data framework. Using the panel cointegration and Vector error correction mechanism (VECM) technique, the study reveals that both the financial and real sector indicators are cointegrated and the short-run errors are corrected significantly to establish that there is bilateral causality between credit and output in both long run and short run.

Parity funding of health care contributions in Germany: A DSGE perspective

AbstractGermany reintroduced parity funding of the statutory health insurance scheme in January 2019 by lowering the contribution rates for employees and raising those for employers, leaving the total rate constant. This reduces the tax wedge between total labour costs and net wages. After a small demand impulse on impact, followed by a small downturn in the first two years after implementation, an estimated New Keynesian DSGE model indicates small positive long-run output and employment effects. However, the reduced tax wedge leads to lower public revenues. Aggregate macroeconomic and welfare effects will depend on how the government compensates for these revenue losses.

Políticas Fiscais para Estabilização da Dívida Pública: uma abordagem de equilíbrio geral aplicada ao Brasil

Resumo Usamos um modelo de equilíbrio geral aplicado dinâmico e determinístico com um agente representativo para avaliar alternativas de política fiscal para o Brasil. As alterações do mix fiscal que mais aumentam o produto per capita de longo prazo (em cerca de 2%) são: a redução do consumo do governo acompanhada pela redução da alíquota do imposto de renda sobre o capital e o aumento do investimento do governo financiado pela redução das transferências. A primeira delas também é a que produz o maior aumento do bem-estar. As estratégias de consolidação da dívida pública consideradas usaram apenas um instrumento fiscal e visaram reduzir a dívida pública em 10% em dez anos e sua estabilização subsequente. Sob o ponto de vista do nível de consumo e do nível do estoque de capital no longo prazo, e do fluxo descontado de bem-estar, o melhor instrumento foi na alíquota do imposto de renda sobre o capital. Sob a ótica do produto no longo prazo, o melhor instrumento foi o investimento do governo, seguido pela alíquota do imposto sobre a renda do capital.

A Fisherian Approach to Financial Crises: Lessons from the Sudden Stops Literature

Sudden Stops are financial crises defined by a large, sudden current-account reversal. They occur in both advanced and emerging economies and result in deep recessions, collapsing asset prices, and real exchange-rate depreciations. They are preceded by economic expansions, current-account deficits, credit booms, and appreciated asset prices and real exchange rates. Fisherian models (i.e. models with credit constraints linked to market prices) explain these stylized facts as an outcome of Irving Fisher's debt-deflation mechanism. On the normative side, these models feature a pecuniary externality that provides a foundation for macroprudential policy (MPP). We review the stylized facts of Sudden Stops, the evidence on MPP use and effectiveness, and the findings of the literature on Fisherian models. Quantitatively, Fisherian amplification is strong and optimal MPP reduces sharply the size and frequency of crises, but it is also complex and potentially time-inconsistent, and simple MPP rules are less effective. We also provide a new MPP analysis incorporating investment. Using a constant debt-tax policy, we construct a crisis probability-output frontier showing that there is a tradeoff between financial stability and long-run output (i.e., reducing the probability of crises reduces long-run output). Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Manufacturing Risk-free Government Debt

Governments face a trade-off between insuring bondholders and insuring taxpayers against output shocks. If they insure bondholders by manufacturing risk-free zero-beta debt, then they can only provide limited insurance to taxpayers. Taxpayers will pay more taxes in bad times regardless of whether output shocks are permanent or temporary. Permanent shocks impute long-run output risk to the debt while transitory shocks impute interest rate risk, all of which must be offset through taxation to keep the debt safe. Conversely, if governments insure taxpayers against adverse macro shocks, then the debt becomes risky. Convenience yields on government debt temporarily alleviate the trade-off.

The Impact of Aging and Automation on the Macroeconomy and Inequality

We build a life-cycle model in which a representative firm produces a final good using routine and non-routine labor as well as traditional and automation capital (e.g. robots). Robots can substitute for routine labor. We show that both, population aging and higher robot productivity, foster the increased use of robotics. Population aging decreases and progress in robot technology increases long-run output per capita. In both cases, inequalities in labor income, wealth and consumption rise. Although expected advances in automation technologies are able to mitigate or even circumvent output losses in the aggregate and improve consumption possibilities for everyone, this comes at the cost of increased inequality because non-routine workers benefit disproportionately.

Manufacturing Risk-Free Government Debt

Governments face a trade-off between insuring bondholders and insuring taxpayers against output shocks. If they insure bondholders by manufacturing risk-free zero-beta debt, then they can only provide limited insurance to taxpayers. Taxpayers will pay more taxes in bad times regardless of whether output shocks are permanent or temporary. Permanent shocks impute long-run output risk to the debt while transitory shocks impute interest rate risk, all of which must be offset through taxation to keep the debt safe. Conversely, if governments insure taxpayers against adverse macro shocks, then the debt becomes risky. Convenience yields on government debt temporarily alleviate the trade-off.

The Macroeconomic Consequences of Infrastructure Investment

Can greater investment in infrastructure raise long-run output? Are infrastructure projects a good short-run stimulus to the economy? This paper uses insights from the macroeconomics literature to address these questions. I begin by analyzing the effects of government investment in both a stylized neoclassical model and a medium-scale New Keynesian model, highlighting the economic mechanisms that govern the strength of the short-run and long-run impacts. The analysis confirms earlier findings that the implementation delays inherent in infrastructure projects reduce short-run multipliers in most cases. In contrast, long-run multipliers can be sizable when government capital is productive. Moreover, these multipliers are greater if the economy starts from a point below the socially optimal amount of public capital. Turning to empirical estimation, I use the theoretical model to explain the econometric challenges to estimating the elasticity of output to public infrastructure. Using both artificial data generated by simulations of the model and extensions of existing empirical work, I demonstrate how both general equilibrium effects and optimal choice of public capital are likely to impart upward biases to output elasticity estimates. Finally, I review and extend some empirical estimates of the short-run effects, focusing on infrastructure spending in the ARRA.

Macroprudential policy under incomplete information

ABSTRACTIn this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policy-makers have noisy and lagged data. 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 policy-maker 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, which could outweigh their macroeconomic and financial stability benefits.

Electricity Consumption and Economic Growth in Nigeria: A Sectoral Analysis

This paper examines the causality between electricity consumption and economic growth in Nigeria, with a focus on sectorial analysis. The sectors considered are manufacturing sector, agriculture sector, and the service sector. The study covers the periods from 1981 to 2014. The study was done in a vector error correction model (VECM). The results show that the causality run from manufacturing sector to electricity consumption in long run, but a bidirectional causality in the short run, from electricity consumption to service sector output in the long run, and from electricity consumption to service sector output in long run. There is no short run causality between electricity consumption and service sector and agricultural sectors outputs. The paper concludes with the recommendation that government should be careful in implementing electricity conservation policy

Does the composition of government expenditure matter for Eastern Caribbean economies’ long-run sectoral output growth?

PurposeThis study takes a disaggregated approach to investigate the impacts of long-run GDP on changes in total government expenditure in the Eastern Caribbean Currency Union (ECCU) economies. An understanding of the relationship between changes in total government expenditure and GDP (by sector categories) is expected to provide a working tool to understand the growth debt nexus of Caribbean countries. The purpose of the paper is to use an auto regressive distributed lag (ARDL) and error correction model (ECM) to examine and analyse short- and long-run dynamics of disaggregated approach to both output and government expenditure in a dynamic model to identify the growth in the Eastern Caribbean Countries.Design/methodology/approachIn an attempt to examine the long-run dynamics, data for the period 1970-2015 were used in an ARDL and ECM framework. The authors examine the long-run GDP impacts of changes in total government expenditure and in the shares of different spending categories for the ECCU countries to establish and analyse short and long-run dynamics.FindingsThe results suggest that total fiscal expenditure and disaggregated expenditure including debt services have both positively and negatively contributed to economic growth in the agriculture, manufacturing and mining sectors. Among others, the study found that high national debt in the region resulted primarily from increases in government expenses and diminishing income sources.Originality/valueThis paper is the first to take a disaggregated approach to investigate the relationship between economic growth and government expenditure in the Eastern Caribbean States. The authors’ empirical results suggest that debt servicing reduces economic growth both in the short and long run. The greatest impact being felt in the mining and manufacturing sectors, namely, 1 per cent increase in debt service will bring about 7.90 and 1.67 per cent decrease in economic growth. These results offer fairly strong support to the view that expenditure share variables can weaken sectoral growth, and hence force the overall growth to decline.

The nexus of renewable and nonrenewable energy consumption, trade openness, and CO2 emissions in the framework of EKC: evidence from emerging economies.

Emerging economies are experiencing considerable economic changes due to change in energy demand and CO2 emissions. To explore the link between energy demand and CO2 emissions, this study disaggregates energy consumption into renewable and nonrenewable, and investigates its impact on carbon (CO2) emissions by incorporating the role of trade openness using the environment Kuznets curve (EKC) framework. Emerging economies from 1990 to 2015 are examined based on Morgan Stanley Capital International's (MSCI's) classification. This empirical study uses cross-sectional dependence (CD) test and second-generation panel unit root test for precise estimation. The Pedroni and Westerlund panel cointegration tests are used to examine the long-run equilibrium. Continuously updated fully modified (CUP-FM) and continuously updated bias-corrected (CUP-BC) approaches are applied to investigate long-run output elasticities while the vector error correction model (VECM) is used to examine the direction of causal relationships among the variables. The results show that renewable energy consumption affects the CO2 emissions negatively while nonrenewable energy consumption positively impacts the CO2 emissions. The study also supports the EKC hypothesis. Trade openness adversely affects the CO2 emissions which are an imperative inclination of these economies towards globalization. Moreover, in the long run, energy consumption from renewable energy and economic growth Granger cause CO2 emission, nonrenewable energy, and trade openness. In the short run, renewable energy Granger causes economic growth, while economic growth Granger causes nonrenewable energy. The study offers some vital policy suggestions for these emerging economies and some interesting lessons for the developing economies.