Financial Cyclical Factors and Growth: Insights from an Augmented Stochastic Solow Growth Model

33 Pages Posted: 19 Jul 2016

See all articles by Michael Donadelli

Michael Donadelli

Leibniz Institute for Financial Research SAFE

Giulia Livieri

Scuola Normale Superiore

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: July 18, 2016

Abstract

We present an augmented stochastic version of the Solow neoclassical growth model to examine whether financial factors -- expressed as deviations from their trend -- represent important business cycle drivers.

Our novel framework is used to study the dynamics of the US growth over the period 1890-2013. We find that financial cyclical factors played an important role in explaining output fluctuations in the US over the last century.

By comparing different model specifications, we show that the role of each specific financial factor in explaining growth changes over time generating model's instability.

Taken together, our results have implications for the effectiveness of medium-term policy interventions.

Accounting for such cyclical factors is thus relevant for policymakers.

Keywords: Stochastic Growth Model, Cyclical Fluctuations, Financial Factors, State Space Model

JEL Classification: O40, E32, C32

Suggested Citation

Donadelli, Michael and Livieri, Giulia and Paradiso, Antonio, Financial Cyclical Factors and Growth: Insights from an Augmented Stochastic Solow Growth Model (July 18, 2016). Available at SSRN: https://ssrn.com/abstract=2811314 or http://dx.doi.org/10.2139/ssrn.2811314

Michael Donadelli

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Giulia Livieri (Contact Author)

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

Antonio Paradiso

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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