"A Financial Sector Balance Approach and the Cyclical Dynamics of the U.S. Economy"

This paper investigates the relationship between asset markets and business cycles with regard to the United States economy. We consider the Goldman Sachs approach (2003) developed to study the dynamics of financial balances. By means of a small econometric model we find that asset market dynamics are fundamental to determining the long-run financial sector balance dynamics. The gap between long-run equilibrium values and the actual values of the financial balances help to explain the cyclical path of the economy. Among all financial sectors balances, the financing gap in the corporate sector shows a leading effect on business cycles, in a Minskyan spirit. The last results appear innovative with respect to Goldman Sachs's findings. Furthermore, our econometric results are robust and quite stable.

Inflation and consumption in a long term perspective with level shift

This article examines the existence and stability of the consumption function in the United States of America (US) economy during a sample period, beginning in the 1950s. In order to obtain a stable long run relationship, we have introduced two innovative elements into the analysis of the life-cycle of the consumption function with wealth effects: 1) a shift level break in the cointegrating relationship, and 2) using inflation as an additional explanatory variable. By implementing a well structured estimation strategy we found that, after taking the shift level break into account, a cointegration including inflation exists and is more stable for the critical sub-samples than traditional consumption function models.Consumption, Cointegration, Inflation, Shift level break

Private sector balance, financial markets, and U.S. cycle: A SVAR analysis

Purpose – Considering the sectoral balance approach of Godley, and focusing only on the two main components of the private sector balance for the U.S. economy (household and non-financial corporate balance), we investigate the relationship between these two sectors, the financial variables, and economic cycle. In particular, we consider all these relationships endogenously. Design/methodology/approach – We estimate a structural VAR model between household and (non-financial) corporate financial balances, financial markets, and economic cycle and we perform an impulse response analysis. All the variables are expressed as cyclical components applying the Hodrick-Prescott filter. Findings - The main result is that: (1) household and corporate balances react to financial markets in the way we expected and discussed; (2) the economic cycle influences the two financial balances; (3) the corporate balance has a positive impact on the cycle; (4) the economic cycle and financial balances influence the financial variables. In particular, point (3) shows that the corporate balance is a leading component of the cycle as suggested by Casadio and Paradiso (2009) and accords with Minsky’s theory of financial instability. Research limitations/implications – The analysis does not include the foreign sector (current-account balance). Originality/value – Our contribution is an important step forward with respect to the two main contributions in literature which use this approach: the Levy Institute macroeconomic team and Goldman Sachs. Methodologically their models are based on some assumptions (such as exogeneity or market clearing price mechanism for the financial markets) which we overcome considering all the relationships studied in an endogenous manner.Household financial balance, Corporate financial balance, Business cycle, Financial markets, SVAR

"The Household Sector Financial Balance, Financing Gap, Financial Markets, and Economic Cycles in the US Economy: A Structural VAR Analysis"

This paper investigates private net saving in the US economy—divided into its principal components, households and (nonfinancial) corporate financial balances—and its impact on the GDP cycle from the 1980s to the present. Furthermore, we investigate whether the financial markets (stock prices, BAA spread, and long-term interest rates) have a role in explaining the cyclical pattern of the two private financial balances. We analyze all these aspects estimating a VAR—between household and (nonfinancial) corporate financial balances (also known as the corporate financing gap), financial markets, and the economic cycle—and imposing restrictions on the matrix A to identify the structural shocks. We find that households and corporate balances react to financial markets as theoretically expected, and that the economic cycle reacts positively to corporate balance, in accordance with the Minskyan view of the operation of the economy that we have embraced.Household Financial Balance; Financing Gap; Business Cycle; Financial Markets; SVAR

The dynamics of Italian public debt: Alternative paths for fiscal consolidation

This paper analyses possible targets for the Italian debt-to-GDP ratio with a small macroeconomic model. The role of international macroeconomic variables such as the US GDP growth, prices of raw materials, EUR/USD exchange rate, and ECB monetary policy stance and domestic policy instruments is analyzed in the debt dynamics. We find that external conditions play a fundamental role for the Italian fiscal consolidation. To reach a target of 100% of debt-to-GDP ratio by 2020, a further growth sustaining policy has to be implemented.Debt to GDP Ratio, Italian Economy, International Factors, SUR.

Estimates of the steady state growth rates for the Scandinavian countries: a knowledge economy approach

This paper estimates the steady state growth rate for Scandinavian countries with a “knowledge economy” approach. We shall use an extended version of the Solow (1956) growth model, in which total factor productivity is assumed to be a function of human capital (measured by average years of education), trade openness and investment ratio. Using this framework we show that these factors, and in particular the education variable, have played an important role to determine the long run growth rates of the Scandinavian countries. Some policy measures are identified to improve the long-run growth rates for these countries.Endogenous growth models, Trade openness, human capital, investment ratio, Steady state growth rate, Scandinavian countr

Inflation and consumption in a long term perspective with level shift

This article examines the existence and stability of the consumption function in the United States of America (US) economy during a sample period, beginning in the 1950s. In order to obtain a stable long run relationship, we have introduced two innovative elements into the analysis of the life-cycle of the consumption function with wealth effects: 1) a shift level break in the cointegrating relationship, and 2) using inflation as an additional explanatory variable. By implementing a well structured estimation strategy we found that, after taking the shift level break into account, a cointegration including inflation exists and is more stable for the critical sub-samples than traditional consumption function models

Private sector balance, financial markets, and U.S. cycle: A SVAR analysis

Purpose – Considering the sectoral balance approach of Godley, and focusing only on the two main components of the private sector balance for the U.S. economy (household and non-financial corporate balance), we investigate the relationship between these two sectors, the financial variables, and economic cycle. In particular, we consider all these relationships endogenously. Design/methodology/approach – We estimate a structural VAR model between household and (non-financial) corporate financial balances, financial markets, and economic cycle and we perform an impulse response analysis. All the variables are expressed as cyclical components applying the Hodrick-Prescott filter. Findings - The main result is that: (1) household and corporate balances react to financial markets in the way we expected and discussed; (2) the economic cycle influences the two financial balances; (3) the corporate balance has a positive impact on the cycle; (4) the economic cycle and financial balances influence the financial variables. In particular, point (3) shows that the corporate balance is a leading component of the cycle as suggested by Casadio and Paradiso (2009) and accords with Minsky’s theory of financial instability. Research limitations/implications – The analysis does not include the foreign sector (current-account balance). Originality/value – Our contribution is an important step forward with respect to the two main contributions in literature which use this approach: the Levy Institute macroeconomic team and Goldman Sachs. Methodologically their models are based on some assumptions (such as exogeneity or market clearing price mechanism for the financial markets) which we overcome considering all the relationships studied in an endogenous manner

Private sector balance, financial markets, and U.S. cycle: A SVAR analysis

Purpose – Considering the sectoral balance approach of Godley, and focusing only on the two main components of the private sector balance for the U.S. economy (household and non-financial corporate balance), we investigate the relationship between these two sectors, the financial variables, and economic cycle. In particular, we consider all these relationships endogenously. Design/methodology/approach – We estimate a structural VAR model between household and (non-financial) corporate financial balances, financial markets, and economic cycle and we perform an impulse response analysis. All the variables are expressed as cyclical components applying the Hodrick-Prescott filter. Findings - The main result is that: (1) household and corporate balances react to financial markets in the way we expected and discussed; (2) the economic cycle influences the two financial balances; (3) the corporate balance has a positive impact on the cycle; (4) the economic cycle and financial balances influence the financial variables. In particular, point (3) shows that the corporate balance is a leading component of the cycle as suggested by Casadio and Paradiso (2009) and accords with Minsky’s theory of financial instability. Research limitations/implications – The analysis does not include the foreign sector (current-account balance). Originality/value – Our contribution is an important step forward with respect to the two main contributions in literature which use this approach: the Levy Institute macroeconomic team and Goldman Sachs. Methodologically their models are based on some assumptions (such as exogeneity or market clearing price mechanism for the financial markets) which we overcome considering all the relationships studied in an endogenous manner