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How does global demand for financial services promote domestic growth in Luxembourg? A dynamic general equilibrium analysis

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  • Marchiori, Luca
  • Pierrard, Olivier

Abstract

This paper studies the transmission of a change in the global demand for financial services on the domestic growth of an international financial center. To capture most of the possible interactions, we develop a dynamic general equilibrium model that we calibrate on Luxembourg data. Results show that the financial multiplier (ratio of a change in output to a change in the financial sector value added) is above 2 in the medium run and largely above 1 in the long run. The main transmission channels are net exports (expenditure approach) or capital income (income approach) in the medium run and investment in the long run. Moreover, the global demand for financial services has substantial implications for public finances. These findings also mean that a sudden loss of confidence towards a specific international financial center might have dramatic consequences for its whole economy.

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  • Marchiori, Luca & Pierrard, Olivier, 2017. "How does global demand for financial services promote domestic growth in Luxembourg? A dynamic general equilibrium analysis," Economic Modelling, Elsevier, vol. 62(C), pages 103-123.
  • Handle: RePEc:eee:ecmode:v:62:y:2017:i:c:p:103-123
    DOI: 10.1016/j.econmod.2016.12.020
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    Cited by:

    1. Luca Marchiori, 2020. "PENELOPE: Luxembourg Tool for Pension Evaluation and Long-Term Projection Exercises," BCL working papers 140, Central Bank of Luxembourg.
    2. Maksim Evseevich Krivelevich, 2019. "Export-Oriented Financial Center in the Russian Far East: Abstraction or Reality?," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 2, pages 75-91.
    3. Ibrahima Sangaré, 2019. "Housing sector and optimal macroprudential policy in an estimated DSGE model for Luxembourg," BCL working papers 129, Central Bank of Luxembourg.

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    More about this item

    Keywords

    General equilibrium model; Long run evolution; Financial multiplier;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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