The finance-growth nexus in the age of financialisation: An empirical reassessment for the European Union countries

This paper draws an empirical reassessment of the finance-growth nexus by performing a panel data econometric analysis for all 28 European Union countries over 27 years from 1990 to 2016. Since the mid-1980s, the financial system has experienced a strong liberalisation and deregulation by preventing its beneficial effects on the real economy. This phenomenon, typically called financialisation, points to a negative view of finance and contradicts the well-entrenched hypothesis on the finance-growth nexus. We estimate both linear and non-linear growth models by incorporating seven proxies of finance (money supply, domestic credit, financial value added, short-term interest rate, long-term interest rate, stock market volume traded and stock market capitalisation) and five control variables (the lagged growth rate of the real per capita gross domestic product, the inflation rate, the general government consumption, the degree of trade openness and the education level of the population). Our results show that finance has impaired economic growth in the EU countries, both in the pre-crisis period and in the crisis and post-crisis periods. The enormous growth of domestic credit and of the financial value added have been restraining the economic growth of the EU countries since 1990 and particularly up until the Great Recession. This implies the need to reduce the prominence of finance, i.e. so-called de-financialisation, in the coming years in order to avoid the potential new ‘secular stagnation’ in the current age of financialisation.info:eu-repo/semantics/publishedVersio

The New Keynesian Model: An empirical application to the euro area economy

This paper empirically applies the New Keynesian Model to the euro area’s economy during the period from the first quarter of 1999 to the last quarter of 2008, which is consistent with the scant empirical evidence on this Dynamic Stochastic General Equilibrium model. Specifically, we proceed with an econometric estimation of the IS Curve, the Phillips Curve and the Taylor Rule to assess the ability of these three equations to describe the dynamics of aggregate demand and the inflation rate in the euro area, as well as monetary policy steering by the European Central Bank during its first 10 years. The New Keynesian Model is estimated using the Generalized Method of Moments, since the three equations denote hybrid features including backward and forward looking behaviours by economic agents and elements with rational expectations. Although this method of estimation may present some limitations, the New Keynesian Model seems to describe reasonably well the evolution of economic activity, the inflation rate and monetary policy in the euro area. Against this backdrop, the New Keynesian Model may provide an important tool for aiding the governments of euro area countries and the European Central Bank in the adoption and implementation of its policies over time.FC

Financialisation and real investment in the European Union using a country-level analysis: beneficial or prejudicial effects?

This paper makes an empirical assessment of the relationship between financialisation and real investment by non-financial corporations using panel data composed of 27 European Union countries over 19 years (from 1995 to 2013). On one hand, financialisation leads to a rise in financial investments, deviating funds from real investments (“crowding out” effect). On the other, pressures from shareholders to intensify financial payments restrict the funds available for new real investments. We estimate an aggregate investment equation with the traditional variables (profitability, debt, cost of capital, savings rate and output growth) and two further measures of financialisation (financial receipts and financial payments). Findings show that financialisation has damaged real investment in European Union countries, mainly through the channel of financial payments either in interest or dividend payments. It is also found that the prejudicial effects of financialisation in investment are more marked in more financialised countries. In addition, it is concluded that debt has a harmful effect on real investment as the increasing levels of non-financial corporations' indebtedness prevent the use of new debts to finance real investments.FC

Drivers of private consumption in the era of financialisation: new evidence for European Union countries

This paper provides an empirical assessment of private consumption in the era of financialisation, using panel data for all 28 European Union countries from 1995 to 2019. According to the Post-Keynesian literature, there are two stylised facts: a fall in household labour income and an increase in both household debt and household financial and housing wealth. The two developments have opposite effects, with the former lowering private consumption and the latter increasing it. A Post-Keynesian private consumption equation is estimated by including four variables connected to those two stylised facts (household labour income, household debt, household financial wealth, and household housing wealth) and five additional control variables (lagged private consumption, short-term interest rate, long-term interest rate, inflation rate and unemployment rate). The results show that these two stylised facts have been detrimental to private consumption in the European Union countries as a whole, and more specifically in the euro area countries. The positive debt and wealth effects have not been sufficient to compensate for the negative labour income effect. The fall in household labour income has been the greatest constraint on the evolution of private consumption in the euro area countries.info:eu-repo/semantics/acceptedVersio

Does the financial system support economic growth in times of financialisation? Evidence for Portugal

The purpose of this paper is the conduction of a time series econometric analysis in order to examine empirically the relationship between the financial system and economic growth in Portugal from 1977 to 2016. The Portuguese financial system has experienced a strong wave of privatisations, liberalisations and deregulations since the adhesion of Portugal to the European Economic Community in 1986, which has not favoured a sustained path of strong economic growth since then. The growth of the financial system played even a crucial role in the recent sovereign debt crisis in Portugal, casting doubts on the conventional hypothesis on the finance-growth nexus. The paper estimates a linear growth model and a non-linear growth model, which includes four proxies for the financial system (money supply, credit, financial value added and stock market capitalisation) and four further control variables (inflation, government consumption, trade openness and education). The paper finds a negative linear relationship between the banking system and Portuguese economic growth, a positive linear relationship between the stock markets and Portuguese economic growth, a concave quadratic relationship between the banking system and Portuguese economic growth, and a convex quadratic relationship between the stock markets and Portuguese economic growth. This suggests that Portuguese policy makers should canalise efforts to decrease the importance of banking system and to increase the importance of stock markets in order to support more robust economic growth in the coming years.FC

Financialisation and inequality in the semi-periphery: Evidence from Portugal

Despite being a disputed concept in the literature, financialisation broadly refers to the growing weight of finance in modern economies. This chapter looks at how the evolution of inequality in Portugal is related to financialisation. It analyses functional income distribution, looking at the wage share and rentier income. The chapter focuses on personal income distribution and poverty. It approaches briefly other effects of financialisation and other factors explaining functional and personal income inequality and poverty. Wage inequality is relevant to analyse the distribution of income before state intervention with taxes and social policies. When analysing income inequality, the focus is on relative differences between households, without concern for poverty, that is, for the incapacity of some households for having a minimum income that ensures an ordinary living pattern. In conclusion, the Portuguese experience shows that the financialisation process has some direct and indirect effects on income inequality.info:eu-repo/semantics/acceptedVersio

Financialisation and the Portuguese real investment: a supportive or a disruptive relationship?

JEL CLASSIFICATION C22, D20, E22 and E44This paper aims to address empirically the relationship between financialisation and real investment by Portuguese non-financial corporations from 1977 to 2013. An equation to describe aggregate investment is estimated, which includes the traditional or standard variables (profitability, debt, cost of capital, savings rate and business cycle) and two further measures to capture the phenomenon of financialisation (financial receipts and financial payments). Financialisation, on the one hand, leads to a rise of financial investments by non-financial corporations, which deviates funds from real investment (“crowding out” effect). On the other hand, the pressure to intensify financial payments restrains the available funds for real investments. The paper concludes that there is a long-term relationship between all variables, and also finds evidence that the process of financialisation has hampered real investment, mainly through financial payments.FC

Financialisation and the portuguese private consumption: two contradictory effects?

This paper makes an empirical evaluation of the relationship between financialisation and the Portuguese private consumption by performing a time series econometric analysis from the first quarter of 1996 to the last quarter of 2016. Framed within the post-Keynesian literature, financialisation has two contradictory effects on private consumption. The first one corresponds to the fall in the households’ labour income, which favours a deceleration of private consumption. The second one corresponds to the increase of households’ financial and housing wealth, which favours an acceleration of private consumption. The global net effect of financialisation tends to be positive because the beneficial wealth effect suppresses the harmful income effect. We estimated a private consumption equation that includes four control variables (unemployment rate, inflation rate, short-term interest rate and long-term interest rate) and three variables linked to financialisation (labour income, financial wealth and housing wealth). Our results confirm that labour income, financial wealth and housing wealth are positive determinants of Portuguese private consumption. Our results also show that financialisation has represented an important driver of Portuguese private consumption, particularly due to the beneficial effects of financial wealth.FC

Household indebtedness in the European Union countries: Going beyond the mainstream interpretation

This paper develops a panel data econometric analysis in order to determine the main macroeconomic causes of household indebtedness in the European Union countries from 1995 to 2019. During that time, household indebtedness reached unprecedented and unsustainable levels, which played a crucial role in the emergence of the last financial and economic crisis. This is not clearly well interpreted by the mainstream economics, which advocates that household indebtedness is just an instrument to smooth consumption in a continuous process of utility maximization over life. This paper estimates a model according to which the household indebtedness depends on seven mainstream and non-mainstream macroeconomic causes, namely housing prices, financial asset prices, personal income inequality, the households’ labour income, welfare state expenditures, the working-age population and interest rates. This paper finds that housing prices, welfare state expenditures and interest rates impact positively on household indebtedness in the European Union countries, whilst the financial asset prices, personal income inequality and households’ labour income impact negatively on household indebtedness in the European Union countries. This paper also finds that the fall of household labour income and the rise of the housing prices have been the main triggers of household indebtedness in the European Union countries since 1995.info:eu-repo/semantics/publishedVersio

Functional income distribution in a small European country: The role of financialisation and other determinants

JEL CLASSIFICATION C22, D33, E25 and E44This paper makes an empirical analysis of the relationship between financialisation and the evolution of labour income share in Portugal from 1978 to 2012. We estimate an equation for the labour income share that includes standard variables (technological progress, globalisation, education and business cycle) and variables to capture the effect of financialisation. We formulate the hypothesis that the financialisation process may lead to a rise in the inequality of functional income distribution through three channels: the change in the sectorial composition of the economy (due to the increase in the weight of the financial activity and the decrease in government activity), the diffusion of shareholder value governance practices and the weakening of trade unions. Our results show that there is a long-term relationship between all variables and that the financialisation process indirectly affects the labour income share through its impact on government activity and trade union density. The paper also finds evidence supporting the traditional explanations for functional income distribution, namely globalisation, education and business cycle.FC