On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century

Lucas (1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle fluctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method. Estimates of welfare costs show major differences for the pre-WWII and the post-WWII era. They can reach up to 15 times for reasonable parameter values -β=0.985, and ∅=5. For example, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumption if we consider only permanent shocks and 0.61% of consumption if we consider only transitory shocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are 0.11% and welfare costs of business cycles are 0.037% - the latter being very close to the estimate in Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the total welfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business- cycle fluctuations are respectively 0.63% and 1.17% of per-capita consumption. The same figures for the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century

Lucas(1987) has shown a surprising result in business-cycle research: the welfare cost of business cycles are very small. Our paper has several original contributions. First, in computing welfare costs, we propose a novel setup that separates the effects of uncertainty stemming from business-cycle uctuations and economic-growth variation. Second, we extend the sample from which to compute the moments of consumption: the whole of the literature chose primarily to work with post-WWII data. For this period, actual consumption is already a result of counter-cyclical policies, and is potentially smoother than what it otherwise have been in their absence. So, we employ also pre-WWII data. Third, we take an econometric approach and compute explicitly the asymptotic standard deviation of welfare costs using the Delta Method. Estimates of welfare costs show major diferences for the pre-WWII and the post-WWII era. They can reach up to 15 times for reasonable parameter values = 0:985, and = 5. For example, in the pre-WWII period (1901-1941), welfare cost estimates are 0.31% of consumption if we consider only permanent shocks and 0.61% of consumption if we consider only transitory shocks. In comparison, the post-WWII era is much quieter: welfare costs of economic growth are 0.11% and welfare costs of business cycles are 0.037% the latter being very close to the estimate in Lucas (0.040%). Estimates of marginal welfare costs are roughly twice the size of the total welfare costs. For the pre-WWII era, marginal welfare costs of economic-growth and business-cycle uctuations are respectively 0.63% and 1.17% of per-capita consumption. The same gures for the post-WWII era are, respectively, 0.21% and 0.07% of per-capita consumption.

On the welfare costs of business-cycle fluctuations and economic-growth variation in the 20th century and beyond

The main objective of this paper is to propose a novel setup that allows estimating separately the welfare costs of the uncertainty stemming from business-cycle uctuations and from economic-growth variation, when the two types of shocks associated with them (respectively,transitory and permanent shocks) hit consumption simultaneously. Separating these welfare costs requires dealing with degenerate bivariate distributions. Levis Continuity Theorem and the Disintegration Theorem allow us to adequately de ne the one-dimensional limiting marginal distributions. Under Normality, we show that the parameters of the original marginal distributions are not afected, providing the means for calculating separately the welfare costs of business-cycle uctuations and of economic-growth variation. Our empirical results show that, if we consider only transitory shocks, the welfare cost of business cycles is much smaller than previously thought. Indeed, we found it to be negative - -0:03% of per-capita consumption! On the other hand, we found that the welfare cost of economic-growth variation is relatively large. Our estimate for reasonable preference-parameter values shows that it is 0:71% of consumption US$ 208:98 per person, per year.

Foreign direct investment and economic growth: A real relationship or wishful thinking?

Several theories have been advanced on the beneficial effect of foreign direct investment (FDI) on economic growth. However, mixed empirical findings have resulted in a long-standing debate. This study explores the global FDI-growth relationship through an 'informed' econometric analysis predicated on substantial guidance obtained from a detailed investigation of 880 estimates reported in 108 published studies. With model uncertainties alleviated and the core specification benchmarked against the aforementioned assessment, our econometric analysis, utilising a global sample of 140 countries in the period 1970 to 2009, conclusively documents that FDI positively affects economic growth. Moreover, we find that this association holds globally as strongly as in the developing world. Further, it is regional variation rather than within-country variation, and contemporaneous FDI rather than past FDI, which matters for growth. Finally, appropriate absorptive capacity indicators for positive growth are identified to be trade openness and financial development rather than schooling.

A time-varying markov-switching model for economic growth

This paper investigates economic growth’s pattern of variation across and within countries using a Time-Varying Transition Matrix Markov-Switching Approach. The model developed follows the approach of Pritchett (2003) and explains the dynamics of growth based on a collection of different states, each of which has a sub-model and a growth pattern, by which countries oscillate over time. The transition matrix among the different states varies over time, depending on the conditioning variables of each country, with a linear dynamic for each state. We develop a generalization of the Diebold’s EM Algorithm and estimate an example model in a panel with a transition matrix conditioned on the quality of the institutions and the level of investment. We found three states of growth: stable growth, miraculous growth, and stagnation. The results show that the quality of the institutions is an important determinant of long-term growth, whereas the level of investment has varying roles in that it contributes positively in countries with high-quality institutions but is of little relevance in countries with medium- or poor-quality institutions.

How much did China’s WTO accession increase economic growth in resource-rich countries? CEPS Working Document No. 384, 3 October 2013

This Working Document provides an estimate of China’s impact on the growth rate of resource-rich countries since its WTO accession in December 2001. The authors’ empirical approach follows the logic of the differences-in-differences estimator. In addition to temporal variation arising from the WTO accession, which they argue was exogenous to other countries’ growth trajectories, the authors exploit spatial variation arising from differences in natural resource wealth. In this way they can compare changes in economic growth in the pre- and post-accession periods between countries that benefited from the surge in demand for industrial commodities brought about by China’s WTO accession and countries that were less able to do so. They find that that roughly one-tenth of the average annual post-accession growth in resource-rich countries was due to China’s increased appetite for commodities. The authors use this finding to inform the debate about what will happen to economic growth in resource-rich countries as China rebalances and its demand for commodities weakens.

Adaptive economic growth

This paper develops an evolutionary theory of adaptive growth, understood as a product of structural change and economic self-transformation, based upon processes that are closely connected with but not reducible to the growth of knowledge. The dominant connecting theme is enterprise, the innovative variations it generates and the multiple connections between investment, innovation, demand and structural transformation in the market process. The paper explores the dependence of macroeconomic productivity growth on the diversity of technical progress functions and income elasticities of demand at the industry level, and the resolution of this diversity into patterns of economic change through market processes. It is shown how industry growth rates are constrained by higher-order processes of emergence that convert an ensemble of industry growth rates into an aggregate rate of growth. The growth of productivity, output and employment are determined mutually and endogenously, and their values depend on the variation in the primary causal influences in the system.

Economic growth and individual satisfaction in an agent-based economy

Macro and micro-economic perspectives are combined in an eco- nomic growth model. An agent-based modeling approach is used to develop an overlapping generation framework where endogenous growth is supported by work- ers that decide to study depending on their relative (skilled and unskilled) indi- vidual satisfaction. The micro perspective is based on individual satisfaction: an utility function computed from the variation of the relative income in both space and time. The macro perspective emerges from micro decisions, and, as in other growth models of this type, concerns an important allocative social decision the share of the working population that is engaged in producing ideas (skilled work- ers). Simulations show that production and satisfaction levels are higher when the evolution of income measured in both space and time are equally weighted.

Can book-to-market and size be risk factors that predict economic growth in Asia's emerging economies?

We investigate whether the two 2 zero cost portfolios, SMB and HML, have the ability to predict economic growth for markets investigated in this paper. Our findings show that there are only a limited number of cases when the coefficients are positive and significance is achieved in an even more limited number of cases. Our results are in stark contrast to Liew and Vassalou (2000) who find coefficients to be generally positive and of a similar magnitude. We go a step further and also employ the methodology of Lakonishok, Shleifer and Vishny (1994) and once again fail to support the risk-based hypothesis of Liew and Vassalou (2000). In sum, we argue that search for a robust economic explanation for firm size and book-to-market equity effects needs sustained effort as these two zero cost portfolios do not represent economically relevant risk.

Economic growth, inequality and technology adoption in transitional economies

The stylized facts that motivate this thesis include the diversity in growth patterns that are observed across countries during the process of economic development, and the divergence over time in income distributions both within and across countries. This thesis constructs a dynamic general equilibrium model in which technology adoption is costly and agents are heterogeneous in their initial holdings of resources. Given the households‟ resource level, this study examines how adoption costs influence the evolution of household income over time and the timing of transition to more productive technologies. The analytical results of the model constructed here characterize three growth outcomes associated with the technology adoption process depending on productivity differences between the technologies. These are appropriately labeled as „poverty trap‟, „dual economy‟ and „balanced growth‟. The model is then capable of explaining the observed diversity in growth patterns across countries, as well as divergence of incomes over time. Numerical simulations of the model furthermore illustrate features of this transition. They suggest that that differences in adoption costs account for the timing of households‟ decision to switch technology which leads to a disparity in incomes across households in the technology adoption process. Since this determines the timing of complete adoption of the technology within a country, the implications for cross-country income differences are obvious. Moreover, the timing of technology adoption appears to be impacts on patterns of growth of households, which are different across various income groups. The findings also show that, in the presence of costs associated with the adoption of more productive technologies, inequalities of income and wealth may increase over time tending to delay the convergence in income levels. Initial levels of inequalities in the resources also have an impact on the date of complete adoption of more productive technologies. The issue of increasing income inequality in the process of technology adoption opens up another direction for research. Specifically increasing inequality implies that distributive conflicts may emerge during the transitional process with political- economy consequences. The model is therefore extended to include such issues. Without any political considerations, taxes would leads to a reduction in inequality and convergence of incomes across agents. However this process is delayed if politico-economic influences are taken into account. Moreover, the political outcome is sub optimal. This is essentially due to the fact that there is a resistance associated with the complete adoption of the advanced technology.

Endogenous mortality, human capital and economic growth

We consider growth and welfare effects of lifetime-uncertainty in an economy with human capital-led endogenous growth. We argue that lifetime uncertainty reduces private incentives to invest in both physical and human capital. Using an overlapping generations framework with finite-lived households we analyze the relevance of government expenditure on health and education to counter such growth-reducing forces. We focus on three different models that differ with respect to the mode of financing of education: (i) both private and public spending, (ii) only public spending, and (iii) only private spending. Results show that models (i) and (iii) outperform model (ii) with respect to long-term growth rates of per capita income, welfare levels and other important macroeconomic indicators. Theoretical predictions of model rankings for these macroeconomic indicators are also supported by observed stylized facts.

Economic growth and suicide rate changes : a case in China from 1982 to 2005

It is to estimate the trend of suicide rate changes during the past three decades in China and try to identify its social and economic correlates. Official data of suicide rates and economic indexes during 1982–2005 from Shandong Province of China were analyzed. The suicide data were categorized for the rural / urban location and gender, and the economic indexes include GDP, GDP per capita, rural income, and urban income, all adjusted for inflation. We found a significant increase of economic development and decrease of suicide rates over the past decades under study. The suicide rate decrease is correlated with the tremendous growth of economy. The unusual decrease of Chinese suicide rates in the past decades is accounted for within the Chinese cultural contexts and maybe by the Strain Theory of Suicide.