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Exploring Finance and Growth: A Micro-founded Approach to Economic Development

This seminar, conducted by Federica Barzi at the University of Verona, focuses on the intricate relationship between financial system development and economic growth. Key objectives include analyzing measures to encourage financial development and understanding equilibrium in financial systems through the Financial Applied General Equilibrium (FAGE) model. Discussions revolve around modifying financial variables for sustainable growth and examining the balance between freedom and control in financial flows. Utilizing econometric analyses and dynamic models, the seminar aims to provide insights into financial policies and their impact on economic stability.

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Exploring Finance and Growth: A Micro-founded Approach to Economic Development

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  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

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