Finance and Growth: a Micro-founded Approach

1. Finance and Growth: a Micro-founded Approach Federica Barzi Seminario 21-22 dicembre 2005 Dipartimento di Scienze Economiche Università di Verona

2. Objectives • relationship between the development of financial system structure and economic growth • measures to encourage financial development • equilibrium the financial system through the general equilibrium model (FAGE) • comparative statics analysis on a financial general equilibrium framework • impact of different financial policies

3. Issues • which financial variables need to be modified in order to ensure a sustainable financial-economic equilibrium and growth? • does an optimum and correct balance between freedom and control in financial flows movements exist and, if so, is it really best suited to provide economic growth? • how can a financial authority gain control to lead the economy out of crises or stagnation?

4. How to gauge financial structure? • “…it is a holistic concept similar to the matrix of coefficients in an input-output table, the cells here measuring the relationship of a given financial item to the total of all financial instruments outstanding in a country at a given date, or to the total transactions in financial instruments during a given period” Goldsmith 1975

5. Agents • Households • Firms • Government • Central bank • Rest of the world + Commercial banks + Non-bank financial system + Stock exchange markets (+ Financial planner)

6. Methodology • Financial applied general equilibrium (FAGE) • Stock-Flow consistent model (SFC) • Econometrics analyses (panel data) • Implementation through dynamic models

7. AGE • Attempts to simulate numerically the general equilibrium structure of an economy • Walras law: demand equals supply for all commodities, at a set of relative prices that can be identified (Arrow-Debreu model) • An equilibrium does exists (Fixed point theorem, Scarf’s algorithm)

8. FAGE • Basic data (national accounts, balance of payments, input-output tables, bank and financial systems interflows) • Benchmark equilibrium dataset • Choice of functional forms according to economic and financial variables directly affected by changes in financial policy; • Calibration of the model; • Counterfactual equilibrium for policy change

9. HINTS FOR MODELLING

10. HINTS FOR MODELLING

11. FAGE

12. SFC • It implies the setting of a matrix (FAM - financial accounting matrix) similar to a SAM • This provides “a systematic listing of the financial stocks” where the assets of the agents are displayed by rows and liabilities by columns

13. SFC • Main differences between SAM and FAM

14. Econometrics • i.e. : King-Levine (1993a) - Levine Zervos (1998) • Cross-country regression model G(j)= a + b F(i) + c X + u G(j) = growth indicators F(i) = financial development indicators (FinDI) X = other regressors

15. Growth indicators King-Levine (1993a) • Long-run per capita growth rates • Capital accumulation • Productivity growth

16. FinDIKing-Levine (1993a) • DEPTH(+) • BANK (+) • PRIVY(+)

17. FinDILevine Zervos (1998) • Turnover ratio (+) • Stock market size(̴)

18. Role of institutions

19. Role of financial institutions

20. Stock market and growth • Theoretical debate: • Does stock market support economic growth, capital accumulation, productivity innovation? • How stock market and banks compete in funding firms’ growth? • Possible complementarities

21. Intuition • Simply listing on the national stock exchange does not necessarily foster resource allocation • It must be implemented with the trading of productive technologies • Plus human capital investment