ORGIAZZI, Elsa (2007): Financial Development and Instability: the Role of the Labour Share.
Download (293Kb) | Preview
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 (2004) 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.
|Item Type:||MPRA Paper|
|Original Title:||Financial Development and Instability: the Role of the Labour Share|
|Keywords:||Financial liberalization, Volatility, Labour share, Credit constraint|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E25 - Aggregate Factor Income Distribution
|Depositing User:||Elsa Orgiazzi|
|Date Deposited:||15. Dec 2007 06:37|
|Last Modified:||19. Feb 2013 02:39|
Aghion, P., Bacchetta, P., and Banerjee, A. (2004). Financial development and the instability of open economies. Journal of Monetary Economics, 51(6):1077–1106.
Aghion, P., Banerjee, A., and Piketty, T. (1999). Dualism and macroeconomic volatility. Quarterly Journal of Economics, 114(4):1359–1397.
Bentolila, S. and Saint-Paul, G. (2003). Explaining movements in the labor share. Contributions to Macroeconomics, 3(1):1103–1103.
Bernanke, B. and Gertler, M. (1989). Agency costs, net worth and business fluctuations. The American Economic Review, 79(1):14–31.
Bertola, G. (1993). Factor shares and savings in endogenous growth. American Economic Review, 83(5):1184–1198.
Caballé, J., Jarque, X., and Michetti, E. (2006). Chaotic dynamics in credit constrained emerging economies. Journal of Economic Dynamics and Control, 30(8):1261–75.
Daudey, E. and Garcia-Peñalosa, C. (2007). The personal and the factor distributions of income in a cross-section of countries. Journal of Development Studies, 43(5):812 – 829.
Diwan, I. (1999). Labor shares and financial crises. mimeo, The World Bank.
Duffy, J. and Papageorgiou, C. (2000). A cross country empirical investigation of the aggregate production function specification. Journal of Economic Growth, 5(1):87–120.
Fama, E. F. (1970). Efficient capital markets : A review of theory and empirical work. The journal of Finance, 25(2):383–417.
Frankel, J. and Rose, A. (1995). ’empirical research on nominal exchange rates’. In Grossman, G. and Rogoff, K., editors, Handbook of International Economics, volume 3, chapter 33, pages 1689–1729. Elsevier, 1 edition.
Hamermesh, D. (1996). Labor Demand. Princeton University Press.
Harrison, A. (2002). Has globalization eroded labour’s share? mimeo, University of California Berkeley.
Kaminsky, G., Reinhart, C., and Végh, C. (2004). When it rains, it pours: Procyclical macropolicies and capital flows. in Gertler, M. and K. Rogoff (eds.), NBER Macroeconomics Annual,, pages 11–53.
Kiyotaki, N. and Moore, J. (1997). Credit cycles. Journal of Political Economy, 105(2):211–48.
Kose, A., Prasad, E., and Terrones, M. (2002). Financial integration and macroeconomic volatility. mimeo IMF.
Kravis, I. B. (1959). Relative income shares in fact and theory. American Economic Review, 49(5):917–949.
Miyagiwa, K. and Papageorgiou, C. (2007). Endogenous aggregate elasticity of substitution. Journal of Economic Dynamics and Control, 31(9):2899–2919.
Pintus, P. (2006). International capital mobility and aggregate volatility: the case of credit-rationed open economies. mimeo, GREQAM.
Ramey, G. and Ramey, V. (1995). Cross-country evidence on the link between volatility and growth.
American Economic Review, 85(5):1138–1151. Rodrik, D. (1998). Capital mobility and labor. mimeo, Harvard.
Solow, R. M. (1958). A skeptical note on the constancy of relative shares. American Economic Review, 48(4):618–631.