This paper describes the correlations between inequality and the growth rates in cross-country data. Using non-parametric methods, we show that the growth rate is an inverted U-shaped function of net changes in inequality: Changes in inequality (in any direction) are associated with reduced growth in the next period. The estimated relationship is robust to variations in control variables and estimation methods. This inverted U-curve is consistent with a simple political economy model, although, as we point out, efforts to interpret this model causally run into difficult identification problems. We show that this non-linearity is sufficient to explain why previous estimates of the relationship between the level of inequality and growth are so different from one another.

Inequality and Growth: What Can the Data Say?

A Very Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix

Global financial imbalances can result from financial integration when countries differ in financial markets development. Countries with more advanced financial markets accumulate foreign liabilities in a gradual, long‐lasting process. Differences in financial development also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of nondiversifiable equity and foreign direct investment. Three observations motivate our analysis: (1) financial development varies widely even among industrial countries, with the United States on top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international financial integration; (3) the portfolio composition of U.S. net foreign assets features increased holdings of risky assets and a large increase in debt.

/pdf/financial-integration-financial-development-and-global-26opwvne00.pdf

Financial Integration, Financial Development, and Global Imbalances

It is widely accepted that, for some industries, competition across countries is" economically important and that this competition is strongly affected by exchange rate changes." This paper explores the validity of this view using weekly stock return data on 320 industry pairs" in six countries from 1975 to 1997. It is found that common shocks to industries across countries" are more important than competitive shocks. Weekly exchange rate shocks explain almost" nothing of the relative performance of industries. Using returns measured over longer horizons the importance of exchange rate shocks increases slightly and the importance of common shocks" to industries increases more substantially. Both industry and exchange rate shocks are more" important for industries that produce goods traded internationally, but the importance of these" shocks is economically small for these industries as well.

International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns

How Big Is the Premium for Currency Risk

This paper investigates the role of technology shocks as a propagation mechanism for business cycles using the new technique of business cycle accounting (BCA) and some new evidence from Japan. BCA technique enables us to model the economy as a standard growth model, but extends it to allow multiple propagation channels (referred to as wedges). Applying it to Japan during the period 1980 to 2000, I find that though technology shocks play an important role in propagating market frictions, they are by no means enough to account for the observed economic fluctuations. Investment wedges play a major role, something that standard RBC models fail to recognize and consequently tends to overemphasize the role of technology shocks.

Business Cycle Accounting-How important are technology shocks as a propagation mechanism? Some new evidence from Japan

What are the economic mechanisms that account for sudden growth spurts? Are these mechanisms similar across episodes? Focusing on the economic resurgence of the BRICs over the last decade, we employ the Business Cycle Ac- counting methodology developed by Chari, Kehoe and McGrattan (2007) to address these questions. Our results highlight that while efficiency wedges do contribute in a large part to growth, especially in Brazil and Russia, there is an increasing importance of investment wedge especially in the late 2000s, noted in China and India. The results are typically related to the stages of development with Brazil and Russia coming off a crisis to grow in the 2000s, while India and China were already on a stable growth path. Our conclusions are robust to alternative methodological extensions where we allow shocks to the trend component of efficiency as opposed to traditional shocks to the cyclical component, as well as to standard modifications where we allow for investment adjustment costs. Relating improvements in wedges to institutional and �financial reforms, we �find that �financial development and improvements in effective governance in BRICs are consistent with improvements in investment and efficiency wedges that led to growth

Deconstructing Growth - A Business Cycle Accounting Approach with application to BRICs

The 1998 passage of the Land Revaluation Law in Japan provided regulatory forbearance to Japanese banks in the form of a regulatory capital infusion. We test whether this divergence from international bank capital requirements had an impact on Japanese bank lending behavior. Because this natural experiment created an exogenous supply shock, we can utilize it to disentangle demand and supply effects in order to determine the impact on Japanese bank lending in both the U.S. and Japan. We find that the infusion of regulatory capital had no aggregate impact on Japanese bank lending in Japan, but it did change the allocation of loans. Well-capitalized Japanese banks shifted their lending from low margin, less capital intensive mortgage lending toward higher yielding, more capital intensive commercial loans. Moreover, we find evidence consistent with a shifting of Japanese bank lending activity away from U.S. lending(which is predominately real estate based) to domestic lending to fund manufacturing. Thus, we find that divergences from international capital standards have significant allocative effects on lending, as well as on bank profitability.

/pdf/revisiting-the-level-playing-field-international-lending-3j0bfsb4od.pdf

Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord

After decades of slow growth since Independence from the British Raj, Indian economy registered its own small miracle, when growth rate of GDP per capita surpassed the long term growth rate of many advanced economies. What caused this miracle? In this paper, we search for an answer in the neoclassical growth model. We use productivity as measured by Solow residual as our exogenous shock. Our idea is to quantitatively measure to what extent fluctuations in productivity can account for observed fluctuations in macro economic aggregates in India. We find that exogenous fluctuations in productivity can well account for fluctuations in output during the boom periods of 1982 to 1988 and 1993 to 2002. However, fluctuations in productivity alone results in a much worse drop in output during 1988 to 1993 than observed in the economy.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=928912

Technology as a Channel of Economic Growth in India

During the last two decades, India’s name has figured prominently amongst the list of emerging economies. After decades of slow growth, India entered into a new phase of economic reconstruction during the mid-1980s and the 1990s. In comparison to a measly 1 per cent growth rate in the years following independence from the British Raj in 1947, Indian GDP per capita growth rate reached 1.5 per cent in the 1980s, still not quite up to the benchmark but not dismal either. The picture drastically changed in the 1990s, when the growth rate of GDP per capita reached an average of 5 per cent, much beyond the benchmark and a small miracle on its own.

http://faculty.baruch.cuny.edu/schakraborty/bca_india_chakrabortywider.pdf

Suparna Chakraborty

Papers

Business Cycle Accounting-How important are technology shocks as a propagation mechanism? Some new evidence from Japan

Deconstructing Growth - A Business Cycle Accounting Approach with application to BRICs

Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord

Technology as a Channel of Economic Growth in India

Indian economic growth: Lessons for the emerging economies