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Eurosclerosis or Financial Collapse

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  • Valerie Cerra
  • Sweta Chaman Saxena

Abstract

Sweden represents an archetypal welfare state economy, with extensive government safety nets. Some scholars have attributed a decline in its per capita income ranking since 1970 to "eurosclerosis" or sluggish growth caused by distortionary policies. This paper argues rather, that the permanent loss in output following Sweden''s banking crisis in the early 1990s explains the decline in its per capita GDP ratings. The paper finds no macroeconomic evidence that welfare state policies have deterred growth. The results warn that empirical growth analyses should distinguish between trend output growth and permanent output loss associated, for example, with financial crises.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/29.

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Length: 25
Date of creation: 01 Feb 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/29

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Keywords: Production; Income; welfare state; unemployment; economic growth; per capita income; business cycle; gdp per capita; growth rates; growth rate; social safety nets; social transfers; welfare losses; unemployment rate; unemployment rates; economic growth rates; social insurance; private consumption; business cycles; social security; bargaining; income transfers; welfare states; social services; social safety net; unemployment insurance; marginal welfare; welfare system; business cycle dynamics; per capita incomes; social insurance arrangements; growth theories; unemployment compensation; aging population; social assistance; public welfare; welfare loss; social assistance schemes; aging; welfare consequence;

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References

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  1. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," NBER Working Papers 7750, National Bureau of Economic Research, Inc.
  2. Valerie Cerra & Sweta C. Saxena, 2005. "Growth Dynamics: The Myth of Economic Recovery," Macroeconomics, EconWPA 0508008, EconWPA.
  3. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
  4. Burkhard Drees & Ceyla Pazarbasioglu, 1995. "The Nordic Banking Crises," IMF Working Papers 95/61, International Monetary Fund.
  5. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  6. Sala-I-Martin, X., 1992. "Public Welfare and Growth," Papers, Yale - Economic Growth Center 666, Yale - Economic Growth Center.
  7. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers, Harvard - J.F. Kennedy School of Government 178d, Harvard - J.F. Kennedy School of Government.
  8. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 417-458, December.
  9. Robert J. Barro, 1991. "A Cross-Country Study of Growth, Saving, and Government," NBER Chapters, National Bureau of Economic Research, Inc, in: National Saving and Economic Performance, pages 271-304 National Bureau of Economic Research, Inc.
  10. Persson, Torsten & Tabellini, Guido, 1991. "Is Inequality Harmful for Growth? Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 581, C.E.P.R. Discussion Papers.
  11. James H. Stock & Mark W. Watson, 1993. "A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues and Recent Experience," NBER Chapters, National Bureau of Economic Research, Inc, in: Business Cycles, Indicators and Forecasting, pages 95-156 National Bureau of Economic Research, Inc.
  12. Berndt, Ernst & Hansson, Bengt, 1992. "Measuring the Contribution of Capital in Sweden," Working Paper Series, Research Institute of Industrial Economics 365, Research Institute of Industrial Economics.
  13. Berndt, Ernst R & Hansson, Bengt, 1992. " Measuring the Contribution of Public Infrastructure Capital in Sweden," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 94(0), pages S151-68, Supplemen.
  14. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, Elsevier, vol. 74(2), pages 171-190, November.
  15. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  16. Hansson, Par & Henrekson, Magnus, 1994. " A New Framework for Testing the Effect of Government Spending on Growth and Productivity," Public Choice, Springer, Springer, vol. 81(3-4), pages 381-401, December.
  17. Chang-Jin Kim & Christian J. Murray, 2002. "Permanent and transitory components of recessions," Empirical Economics, Springer, Springer, vol. 27(2), pages 163-183.
  18. Frederick van der Ploeg, 2004. "The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best," CESifo Working Paper Series 1234, CESifo Group Munich.
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Cited by:
  1. Susan Lund & Charles Roxburgh, 2010. "Debt and Deleveraging," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 11(2), pages 1-30, April.

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