Financial development and growth: Testing a dynamic stochastic\ud general equilibrium model via\ud indirect inference

Doctoral thesis English OPEN
Raoukka, Katerina
  • Subject: HB

Macroeconomics research has made a quantum leap in the past decade in establishing a new\ud workhorse model for open economy analysis. The unique characteristic of this literature\ud is the introduction of the financial system in a dynamic general equilibrium (DGE) model\ud which is based on microfoundations. Its introduction in a DGE model is essential to explain\ud empirical facts such as growth differences across countries. The aim of this thesis is to show\ud whether the behavior of growth can be explained by financial development within a classical\ud approach. The model's ability to explain growth by setting financial development as a causal\ud factor is tested against the model's performance to explain growth via setting the human\ud capital as a causal factor. The question proposed and answered in this thesis is the following:\ud Can an increase in productivity be produced by a development in the financial system or\ud in the educational system and if so, is growth determined by this increase in productivity?\ud The empirical performance of DSGE models is under scrutiny by researchers. This thesis is\ud introducing the reader to a fairly new and unfamiliar testing procedure; indirect inference\ud which is fully explained and applied. The idea of the thesis is to provide a better identified\ud model compared to the already established econometric models on the financial development\ud and growth nexus. The procedure followed is firstly to set up a well-established microfounded\ud model and then to connect it to the theory via an establishment of the time series properties\ud of various macroeconomic variables. The results based on 10 sample countries indicate that\ud setting financial development as a causal factor explains the data behavior of macroeconomic\ud variables better than a model which considers human capital as a driver of economic growth.\ud 1
  • References (1)

    2 Financial Development and Human Capital in Growth Theories 20 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.2 Theories of Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.3 The Real Business Cycle Framework . . . . . . . . . . . . . . . . . . . . . . 27 2.4 Real Business Cycles and Economic Growth . . . . . . . . . . . . . . . . . . 30 2.5 Further Extensions to the RBC Framework . . . . . . . . . . . . . . . . . . . 32 2.5.1 Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.5.2 Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.5.3 Open Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.6 The Role of Financial Development in Growth Theories . . . . . . . . . . . . 34 2.7 The Role of Human Capital in Growth Theories . . . . . . . . . . . . . . . . 41 2.7.1 Human Capital Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.7.2 Theory of Human Capital and Economic Growth . . . . . . . . . . . 45 2.7.3 Public Spending on Education and Economic Growth: A Brief Review of the Empirical Work . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2.8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

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