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Cyclical macroeconomic policy, financial regulation and economic growth

  • Philippe Aghion
  • Enisse Kharroubi

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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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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  1. Matias Braun & Borja Larrain, 2004. "Finance and the Business Cycle: International, Inter-industry Evidence," Finance 0403001, EconWPA.
  2. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  3. 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, March.
  4. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  5. Raddatz, Claudio, 2006. "Liquidity needs and vulnerability to financial underdevelopment," Journal of Financial Economics, Elsevier, vol. 80(3), pages 677-722, June.
  6. Stephen G. Cecchetti & Lianfi Li, 2005. "Do Capital Adequacy Requirements Matter for Monetary Policy?," NBER Working Papers 11830, National Bureau of Economic Research, Inc.
  7. Aghion, P. & Askenazy, P. & Berman, N. & Cette, G. & Eymard, L., 2008. "Credit Constraints and the Cyclicality of R&D Investment: Evidence from France," Working papers 198, Banque de France.
  8. 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.
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