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Cyclical macroeconomic policy, financial regulation and economic growth

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  • Philippe Aghion
  • Enisse Kharroubi

Abstract

This paper investigates the effect of cyclical macroeconomic policy and financial sector characteristics on growth. Using cross-country, cross-industry OECD data, it yields two main findings. First, countercyclical fiscal and monetary policies foster growth disproportionately in more credit/liquidity-constrained industries. Second, while higher bank capital ratios may contribute to reducing the benefit of a countercyclical monetary policy, countercyclical credit enhances growth disproportionately in more credit/liquidity-constrained industries and this complements the growth effects of countercyclical monetary policy. Raising regulatory requirements for bank capital can therefore help achieve financial stability and preserve economic growth if complemented with more countercyclical macroeconomic and regulatory policy.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 434.

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Length: 42 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:bis:biswps:434

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Keywords: Growth; financial constraints; fiscal policy; monetary policy; financial regulation;

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References

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  1. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(3), pages 246-265, April.
  2. Stephen G. Cecchetti & Lianfi Li, 2005. "Do Capital Adequacy Requirements Matter for Monetary Policy?," NBER Working Papers 11830, National Bureau of Economic Research, Inc.
  3. Raddatz, Claudio, 2006. "Liquidity needs and vulnerability to financial underdevelopment," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(3), pages 677-722, June.
  4. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Aghion, Philippe & Angeletos, George-Marios & Banerjee, Abhijit & Manova, Kalina, 2010. "Volatility and growth: Credit constraints and the composition of investment," Scholarly Articles 12490636, Harvard University Department of Economics.
  6. Christian Dembiermont & Mathias Drehmann & Siriporn Muksakunratana, 2013. "How much does the private sector really borrow - a new database for total credit to the private non-financial sector," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.
  7. Philippe Aghion & Philippe Askenazy & Nicolas Berman & Gilbert Cette & Laurent Eymard, 2008. "Credit constraints and the cyclicality of R&D investment: Evidence from France," PSE Working Papers, HAL halshs-00586744, HAL.
  8. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 19(3), pages 418-437, July.
  9. Matías Braun & Borja Larrain, 2005. "Finance and the Business Cycle: International, Inter-Industry Evidence," Journal of Finance, American Finance Association, American Finance Association, vol. 60(3), pages 1097-1128, 06.
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Cited by:
  1. Beck, Thorsten & Degryse, Hans & De Haas, Ralph & van Horen , Neeltje, 2014. "When arm’s length is too far. Relationship banking over the business cycle," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 14/2014, Bank of Finland, Institute for Economies in Transition.
  2. Thorsten Beck & Hans Degryse & Ralph de Haas & Neeltje van Horen, 2014. "When Arm's Length Is Too Far. Relationship Banking over the Business Cycle," CESifo Working Paper Series, CESifo Group Munich 4877, CESifo Group Munich.

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