Finance and Growth: Theoretical and Empirical Definitions 2024-2025 PDF

Empirical Banking Finance and Growth THEORETICAL AND EMPIRICAL DEFINITIONS Stefano Caiazza 2024-2025  Some definitions of Growth (1) Nominal Growth is different from Real Growth. 2023: Current-price GDP (US $ in billions)...

Empirical Banking Finance and Growth THEORETICAL AND EMPIRICAL DEFINITIONS Stefano Caiazza 2024-2025  Some definitions of Growth (1) Nominal Growth is different from Real Growth. 2023: Current-price GDP (US $ in billions) Constant-price GDP (US $ billions 2015) 1. US 27,361 1. US 21,776 2. China 17,795 2. China 17,173 3. Germany 4,456 3. Japan 4,617 4. Japan 4,213 4. Germany 3,622 5. India 3,550 5. UK 3,213 6. UK 3,340 6. India 3,199 7. France 3,031 7. France 2,657 8. Italy 2,254 8. Italy 1,985 https://databank.worldbank.org/indicator/NY.GDP.MKTP.CD/1ff4a498/Popular-Indicators#  Some definitions of Growth (2) GDP is different from GDP per capita. 2023: GDP (current US $) per capita GDP (current US $) per capita 1. US 27,361 1.Luxembourg 128,259 2. China 17,795 2.Ireland 103,684 3. Germany 4,456 3.Switzerland 99,995 4. Japan 4,213 4.Norway 87,962 5. India 3,550 5. Singapore 87,743 6. UK 3,340 6.US 81,695 7. France 3,031 32.Italy 38,373 8. Italy 2,254 84.China 12,614 https://databank.worldbank.org/indicator/NY.GDP.MKTP.CD/1ff4a498/Popular-Indicators#  Some definitions of Growth (3) Purchasing Power Parity (PPP) is necessary to compare the growth rates for different countries. The theory of PPP is an application to the exchange market of the Law of One Price (the same good cannot sell for different prices in different locations at the same time) and states that, if international arbitrage is possible, a unit of currency must have the same purchasing power in every country. Limitations: Transaction costs (transport, taxes, tariffs, non-tariff barriers, and duties) Statistics (the baskets of goods are different) Integration (commodity markets are much less integrated than capital markets) The difference in productivity (Balassa-Samuelson effect)  Purchasing Power Parity Suppose: GDP in the US is 10,000$ GDP in India is 10,000Rs (Rupees) and the official exchange rate is 1$=50Rs Suppose you need 10$ to buy a Big Mac in the US. Suppose you need 170 rupees to buy a Big Mac in India. PPP Exchange rate: 10$=170Rs → 10/170 = 1$ =17Rs (PPP exchange rate) It is the number of units of India’s currency needed to purchase in India the same quantity of a specific good as one unit of US currency will purchase in the US. Nominal India’s GDP in $: 10000/50=200$ GDP(PPP)= GDP (rupees) / PPP exchange rate for rupees= 10,000/17 = 588$ India’s GDP(PPP) GDP per capita (PPP based) is gross domestic product converted to international dollars: An international dollar has the same purchasing power over GDP as a U.S. dollar has in the U.S. http://www.economist.com/content/big-mac-index  Some definitions of Growth (3) Purchasing Power Parity (PPP) is necessary to compare the growth rate for different countries. 2023: GDP (current US $) billion GDP (PPP$) billion 1. US 27,361 1. China 34,644 2. China 17,795 2. US 27,361 3. Germany 4,456 3. India 14,538 4. Japan 4,213 4. Russian Fed 6,452 5. India 3,550 5. Japan 6,252 6. UK 3,340 6. Germany 5,858 7. France 3,031 9. France 4,169 8. Italy 2,254 12. Italy 3,452 https://databank.worldbank.org/indicator/NY.GDP.MKTP.CD/1ff4a498/Popular-Indicators#  Solow’s Model Solow was the first scholar to formalize the growth model rigorously. Before Solow, the theme was addressed by proposing ideas through books (Schumpeter and, before him, Adam Smith).  Solow(-Swan)’s Model Solow was the first scholar to rigorously formalize the topic of growth. Before Solow, the theme was dealt with proposing ideas through books (Schumpeter and, before him, Adam Smith). Solow’s model: if economies are equal in the base parameters (technical progress rate, saving rate, population growth rate, depreciation rate of capital) all countries CONVERGE to the same level of capital per worker INDEPENDENTLY from initial conditions of economies (capital stock per worker and wage per worker). Since the production function is concave, the first derivative with respect to each input factor (the marginal product) is positive but the second derivative is negative, then the closer a country is to (its) steady state, the lower is the growth. Implication: poorer economies should grow faster than the richest ones. But this is true IFF initial conditions are the same or do not matter Empirical evidence does not confirm this forecast CONDITIONAL CONVERGENCE: Initial conditions matter, and each country convergences to its own steady state. Countries that are far away from it, grow faster.  β-convergence Intuitively, this convergence notion is simple: two countries exhibit convergence if the one with a lower initial income grows faster than the other and so tends to “catch up” with the higher-income country (Baumol, 1986; Barro, 1991; Barro and Sala-i-Martin, 1992; Mankiw, Romer and Weil, 1992). This notion comes from the neoclassical growth model that emphasizes the role of diminishing returns. It predicts that countries that begin with a relatively low level of income will grow relatively rapidly, but this growth will slow down as the economy approaches its balanced growth path and the marginal product of capital declines towards its steady-state level. In order to translate this economic notion of convergence into a statistical model, we could suppose that all countries have a common steady-state. In this case: (1) 𝑔𝑔 = 𝛼𝛼 + 𝛽𝛽𝑔𝑔𝑖𝑖,0 + 𝜀𝜀𝑖𝑖 (2) 𝑔𝑔𝑖𝑖 = 𝛼𝛼 + 𝛽𝛽𝑔𝑔𝑖𝑖,0 + 𝜀𝜀𝑖𝑖 (1) Unconditional (Absolute) β-convergence holds if β