Financial development and instability: The role of the labour share
This paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee [Aghion, P., Bacchetta, P., Banerjee, A., 2004. Financial development and the instability of open economies. Journal of Monetary Economics 51, 1077-1106] have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bertola, Giuseppe, 1993.
"Factor Shares and Savings in Endogenous Growth,"
American Economic Review,
American Economic Association, vol. 83(5), pages 1184-1198, December.
- Bertola, Giuseppe, 1991. "Factor Shares and Savings In Endogenous Growth," CEPR Discussion Papers 576, C.E.P.R. Discussion Papers.
- Giuseppe Bertola, 1991. "Factor Shares and Savings in Endogenous Growth," NBER Working Papers 3851, National Bureau of Economic Research, Inc.
- Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-1151, December.
- Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
- Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism and Macroeconomic Volatility," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1359-1397.
- Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1997. "Dualism and macroeconomic volatility," CEPREMAP Working Papers (Couverture Orange) 9720, CEPREMAP.
- Piketty, Thomas & Banerjee, Abhijit & Aghion, Philippe, 1999. "Dualism and Macroeconomic Volatility," Scholarly Articles 4554124, Harvard University Department of Economics.
- Bentolila Samuel & Saint-Paul Gilles, 2003. "Explaining Movements in the Labor Share," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-33, October.
- Bentolila, Samuel & Saint-Paul, Gilles, 1998. "Explaining Movements in the Labour Share," CEPR Discussion Papers 1958, C.E.P.R. Discussion Papers.
- Samuel Bentolila & Gilles Saint Paul, 1999. "Explaining movements in the labor share," Economics Working Papers 374, Department of Economics and Business, Universitat Pompeu Fabra.
- Bentollia, S. & Saint-Paul, G., 1999. "Explaining Movements in the Labor Share," Papers 9905, Centro de Estudios Monetarios Y Financieros-.
- Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
- Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
- Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
- Miyagiwa, Kaz & Papageorgiou, Chris, 2007. "Endogenous aggregate elasticity of substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 2899-2919, September.
- Chris Papageorgiou & Kaz Miyagiwa, 2006. "Endogenous Aggregate Elasticity of Substitution," Departmental Working Papers 2006-06, Department of Economics, Louisiana State University.
- Kaz Miyagiwa & Chris Papageorgiou, 2007. "Endogenous Aggregate Elasticity of Substitution," Emory Economics 0707, Department of Economics, Emory University (Atlanta).
- Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
- John Moore & Nobuhiro Kiyotaki, "undated". "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
- Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
- Ryo Kato, 2003. "Matlab code for Kiyotaki-Moore credit cycles," QM&RBC Codes 113, Quantitative Macroeconomics & Real Business Cycles.
- Emilie Daudey & Cecilia Garcia-Penalosa, 2007. "The personal and the factor distributions of income in a cross-section of countries," Journal of Development Studies, Taylor & Francis Journals, vol. 43(5), pages 812-829.
- Caballe, Jordi & Jarque, Xavier & Michetti, Elisabetta, 2006. "Chaotic dynamics in credit constrained emerging economies," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1261-1275, August.
- Jordi Caballe & Xavier Jarque & Elisabetta Michetti, 2004. "Chaotic Dynamics in Credit Constrained Emerging Economies," UFAE and IAE Working Papers 605.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Jordi Caballé & Xavier Jarque & Elisabetta Michetti, 2004. "Chaotic Dynamics in Credit Constrained Emerging Economies," Working Papers 121, Barcelona Graduate School of Economics.
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1077-1106, September.
- Bacchetta, Philippe & Aghion, Philippe & Banerjee, Abhijit, 2004. "Financial Development and the Instability of Open Economies," Scholarly Articles 4554209, Harvard University Department of Economics.
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2004. "Financial Development and the Instability of Open Economies," NBER Working Papers 10246, National Bureau of Economic Research, Inc.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
- Duffy, John & Papageorgiou, Chris, 2000. "A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
- Marco Terrones & Eswar S Prasad & Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Patrick Pintus, 2004. "International Capital Mobility and Aggregate Volatility: the Case of Credit-Rationed Open Economies," Computing in Economics and Finance 2004 193, Society for Computational Economics. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:reecon:v:62:y:2008:i:4:p:215-236. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.