38 research outputs found
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Financialisation and physical investment: a global race to the bottom in accumulation?
We estimate the effects of financialisation on physical investment in the developed and developing countries using panel data based on balance-sheets of publicly listed non-financial companies (NFCs) for the period 1995-2015. Among the developed economies, we focus on the cases of the USA, Japan, and a group of Western European countries. In the developing world, we present estimations based on the group of the NFCs in all developing countries as well as BRICS as a group- and country specific estimations for South Africa, South Korea, India, and China. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets. The negative impacts of financial incomes are non-linear with respect to the companies’ size; financial income crowds out investment in large companies, and have a positive effect on the investment of only smaller, relatively more credit-constrained companies. Our findings support the ‘financialisation thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term concerns for productivity in both developed and developing countries
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Policies to stimulate investment in the age of financialization in Europe
Despite increasing profits private investment remained weak in Europe as firms directed their profits to financial speculation (Tori and Onaran, 2017). Not only high dividend payments but also increasing financial revenues of firms due to their surging financial activities crowd out private investment in physical machinery and equipment. Perversely, financial activities do not automatically provide more funds for productive activity. According to econometric estimations by Tori and Onaran (2017) using firm balance sheet data in Europe the rate of investment by the NFCs would have been 27% higher without the rise in interest and dividend payments, and 10% higher without the crowding-out effect of increasing financial incomes. A properly designed public investment and industrial policy also needs to be complemented by a corporate governance reform to reinstate the missing link between private investments and profits. Under the guidance of a macroeconomic policy framework focused on full employment and equality, which helps to define and improve the vector of choices of firms, shareholders themselves could see the long-term stability of the corporation as their main goal once again
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The Financial Innovation Hypothesis: Schumpeter, Minsky and the <i>sub-prime</i> mortgage crisis
Neo-Schumpeterian economics inspired by the work of Schumpeter and the financial Keynesianism of Minsky are often regarded as unrelated theoretical strands. In this paper, we try to combine these two literature building on a parallelism between non-financial and financial firms. We focus on recent financial innovations, highlighting how the evolution experienced by US financial institutions led them to transcend their traditional role of credit providers, shaping as 'producers' of financial products, through securitization. This allows on the one hand to broaden the application of Neo-Schumpeterian insights to the financial sector and, on the other, to provide an original explanation of the so-called sub-prime crisis by applying the Financial Instability Hypothesis of Minsky to the alternative context of financial production. We maintain that the 2007-8 crisis was not the result of an innovation in the real sector, but came from an innovation (or a series of innovations) intrinsic to the financial system itself, which fostered credit creation. We argue that this 'cluster of innovations' can be placed under the label 'securitization', defined as the business of packaging and reselling loans, with repo agreements as the main source of funds
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Productivity puzzle? Financialization, inequality, investment in the UK
According to econometric estimations using firm balance sheets of the publicly listed companies in the UK, in large non-financial corporations (NFCs), investment rate would have been 16% higher without the rise in financial payments, and 41% higher without the increasing financial incomes, and in the small NFCs, investment would have been 35% higher without the rise in financial incomes
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A critique to the expansionary austerity (part III): empirical counter facts beyond theoretical weaknesses
In two previous contributions published in this working paper series, we pointed out the theoretical fragilities of the expansionary austerity theory (EAT). In this paper, we develop our critique even further by integrating the above theoretical investigation with an econometric model testing for the effectiveness of the mechanisms at the basis of the EAT. We consider a sample of developed economies composed by both monetarily sovereign and non-monetarily sovereign countries. Our time spell runs from 2007 to 2016 since that we are interested to assess the solidity of the EAT postulates in the post-crisis period. Our findings reinforce the validity of our original critique, and are fully consistent with out theoretical model. Since 2007, the core mechanisms of the expansionary austerity theory were not at work, to say the least. Austerity measures did not provide any expansionary impulse to economic activity since that the “expectation”, “financial” and “external” channels were inactive at best, or they acted in the opposite direction with respect to what EAT advocates would have suggested. Further, austerity per se did not restore any sense of credibility about public finance solidity on financial markets. Rather, it exacerbated financial turbulences and speculation on the market for sovereign bonds. Interestingly, austerity measures delivered perverse results precisely in those non-monetarily sovereign countries where they were thought to be mostly effective
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Financialisation, financial development, and investment: evidence from European non-financial corporations
This article provides estimations of the effects of different financial channels on physical investment in Europe using the balance sheets of publicly listed non-financial corporations (NFCs) for the period 1995-2015. The evidence suggests that both financial payments and financial income have an adverse effect on investment in fixed assets. The negative impacts of increasing financial income are non-linear with respect to company size: they crowd out investment in large companies, and have a positive effect on the investment of relatively smaller companies. Similar to the recent literature on finance-growth nexus, we find an inverted U-shaped relationship between financial development and companies’ investment. However, in contrast to the existing literature, we also find that a higher degree of financial development in the country is associated with a stronger negative effect of financial income on investment
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The effects of financialization on investment: evidence from firm-level data for the UK
This paper estimates the effects of financialization on physical investment in the UK using panel data based on balance-sheets of publicly listed non-financial companies supplied by Worldscope for the period 1985-2013. We find robust evidence of an adverse effect of not only financial payments (interests and dividends) but also financial incomes on the rate of accumulation. The negative impacts of financial incomes from interests and dividends are particularly strong for the pre-crisis period. Our findings support the ‘financialization thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term concerns for productivity
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Financial-real side interactions in the monetary circuit: loving or dangerous hugs?
Monetary circuit theory is one of the most known attempts to formally describe the functioning of a monetary production economy as centered around the concept of flux-reflux of money. Endogenous money creation by commercial banks allows the circuit to open and firms to implement production processes. Financial markets ‘passively’ close the circuit by intermediating savings via bond and equity issuance. Despite its natural focus on financial-real side links, the monetary circuit literature has paid relatively little attention to ‘financialization’ and the way it has modified real-financial dynamics. In this paper, we analyze whether the flux-reflux perspective of the circuit may be fruitfully applied to the description of the real-financial linkages in a financialized economy. We propose two interconnected circuits, one for the real economy and one for the financial one. In this context, finance can still ensure a consistent closure of the whole system, thus directly allowing the functioning of the real economy. Newly developed inside-finance interactions, however, may indirectly influence real world dynamics by easing/restricting access to credit/financial markets and give rise to boom-and-bust cycles. Our aim is twofold: modeling modern financial worlds within a MC framework and understanding how financialization could have modified real-financial interactions
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The macroeconomics of shadow banking
In this paper, we propose a simple short-run post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. At the best of our knowledge, this is the first attempt to broaden purely real-side post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007-8 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution. We show that both an ‘exhilarationist’ and a ‘stagnationist’ regime may prevail, nevertheless characterized by a probable increase in income inequality between rentiers and wage earners
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An Investment and Equality-Led Sustainable Development Strategy for Europe
Austerity policies coupled with rising inequality in Europe have resulted in a prolonged stagnation and a vicious circle of chronically low demand, slow down in investment and productivity, and economic, social and political instability. In order to end this vicious cycle, Europe needs directed public investment policies accompanied by industrial policy, higher equality, stimulated demand, and regulation of finance and corporate governance. Our research presents strong empirical evidence that expansionary fiscal policy is sustainable when wage and public investment policies are combined with progressive tax policy; the impact is stronger when these policies are implemented in a coordinated fashion across Europe due to strong positive spill over effects on demand. A strong investment performance also requires a process of de-financialization of the economy and a new approach to corporate governance