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Financial intermediation, economic development and business cycles fluctuations.

Aspachs-Bracons, Oriol (2008) Financial intermediation, economic development and business cycles fluctuations. PhD thesis, London School of Economics and Political Science (United Kingdom).

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Abstract

Identifying the effects of the financial sector on economic growth and business cycles fluctuations has been one the main debates in economics during the last decades. While a lot of progress has been done, we are still far from fully understanding the channels linking the financial sector with the rest of the economy. In the first chapter I focus on the relation between financial development and economic growth. I obtain a measure of the impact of financial development on output from a dynamic general equilibrium model with a productive financial sector. The model predicts that having access to a better financial technology reduces the cost of credit and increases the net return of investment, generating positive and sizeable effects on output. The benefits from a better financial technology are maximized when it is used to invest in ex-ante riskier, but more profitable, investment projects. In the following two chapters I focus on the relation between the performance of the financial sector and business cycle fluctuations. First, I study the impact of credit standards policies. The model used is able to replicate the countercyclical pattern of credit standards documented by the literature. The increase in the probability of default during expansionary periods reduces the efficiency with which investment is transformed into capital. In addition, the increase in the default rate reduces the return of savings, which in turn reduces the labor supply. Second, I study the effects of the financial sector to the economy through the collateral channel for the case of Spain. I find that loosing monetary policy autonomy is of first order importance to cushion risk premium shocks, while this is not the case for housing demand shocks. In addition, labor market rigidities provide stronger amplification effects to all type of shocks than financial frictions do.

Item Type: Thesis (PhD)
Uncontrolled Keywords: Economics, General
Sets: Collections > ProQuest Etheses
Departments > Economics
URI: http://etheses.lse.ac.uk/id/eprint/2988

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