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Crisis and economic growth in the EU

Medium and long-term trends

Acta Oeconomica
Authors:
P. Halmai
and
V. Vásáry

The study analyses the impacts of the financial and economic crisis on potential growth in the European Union. It identifies the main channels of impact mechanism and carries out quantitative estimations in order to reveal the medium and long-term trends. According to over findings the impacts of the crisis are significantly different in the main country-groups of the EU. The basic structural problem of the EU is considered the decreasing trend in potential growth which might be further strengthened through the lasting consequences of the crisis.

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The role of spatial proximity to innovation inputs (such as industrial R&D or academic research) in technological change has been widely studied in the economics literature. However, most of the papers in this research area are based on data for technologically advanced countries such as the US and parts of the EU. During transition recently accessed countries of Central Europe have undergone a dramatic restructuring process that significantly affected their systems of innovation: R&D expenditures, academic research and patenting activity have declined. According to some research results FDI constituted the most significant drive of technological change during the 1990s. Is there any role of spatially mediated knowledge spillovers in innovation in these countries? To what extent regional systems of innovation have started to develop in Central European new EU member countries? These questions have rarely been raised in the relevant literature. Using regional data this paper adopts econometric modelling techniques commonly applied in innovation research to study the role of localised knowledge inputs in technological change in Hungary.

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The paper aims to develop a model of nonlinear economic growth — with simple assumptions — which explains both Japan’s S -shape convergence path and the UK’s declining path toward the US between 1870–2000, and the development of other countries, as well as post-war reconstruction. According to the model, progress in stock of knowledge is formed by a quadratic formula of the relative development of follower countries.The model draws on four recent theories. Firstly, Romer’s theory, which approaches a country’s level of development by using the number of its products (Romer 1990), secondly, Jones’ idea theory with a slight modification (Jones 2004), third, the theory of quality of institutions, which determines economic performance (North 1993), and finally, the theory of physical and human capital. The first part of the paper sets up the production function, the second determines the growth rate and analyses the reconstruction path, while the third draws up model forecasts.

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Acta Oeconomica
Authors:
Konstantinos Katrakilidis
,
Persefoni Tsaliki
, and
Theodosios Tsiakis

This paper empirically explores the validity of the Kaldorian insights into economic growth and development. In doing so, we examine the three laws outlined in Kaldor’s analysis and test their relevance to the Greek economy for the period 1970–2006. We employ the ARDL method to analyse the long-run and short-run relationships among the variables. The empirical results confirm Kaldor’s proposition about the importance of the demand side of the economy and thus provide the necessary theoretical and empirical ground for innovative economic policies in these difficult times for Greece.

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We tested the hypothesis of the political basis for economic rights and constructed our own variables of political regimes’ classification for the years 1820–2000. We found significant positive interdependencies between democracy indicators and economic growth. The protection of private property rights requires, first and foremost, due guarantees for personal immunity. Discretionary arrests and property seizures undermine any formal guarantees of private property, low taxation benefits, etc. Personal immunity should be defended even for “unpleasant” persons or for the possible political opponents of the country’s ruler.

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Abstract

This article provides an agnostic, historical review of taxation and economic growth. It critically evaluates how the relationship between the two has evolved throughout modern history. After an introduction that provides a general overview of the relationship between taxation and growth, the article first discusses the positive role of taxes in promoting economic development in the pre-war and post-war periods of the 1940s. It then critically comments on Solow's neoclassical growth theory and explains the experience of stagflation faced by many advanced countries in the 1970s and its implications for tax theory. New growth theories that attribute an important role in economic growth to government policy in general and tax policy in particular are then discussed. This is followed by a rounded five-point assessment of the impact of taxes on growth. The article ends with a general conclusion.

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Abstract

We investigate the relationship between economic growth and real exchange rate (RER) misalignments within the European Union (EU) during the period of 1995–2016. In addition to the relative price level of GDP, we quantify an alternative indicator for the RER: the internal relative price of services to goods. We interpret RER misalignments as deviations from the levels consistent with the levels of economic development among the EU countries. Using pooled OLS and dynamic panel techniques, we find that within the EU over- (under-) valuations are associated with lower (higher) growth. This is mainly due to developments in the countries operating under the fixed exchange rate regimes. Our results indicate that the level of development does not influence the strength of the growth-misalignment relationship within the EU. Regarding the price level of GDP, we find that the positive relationship between undervaluation and growth diminishes with the degree of undervaluation. We find that overvaluation has a statistically significant negative effect on export market shares and private investments, indicating that both the competitiveness and the investment channels play a role in the relationship between growth and RER misalignments. As an extension, we show that the effects of “wage misalignments” from levels consistent with productivity are also negatively related to economic growth. The policy implications of the analysis point to the importance of a growth strategy avoiding overvaluation on the one hand, and to the futility of aiming at excessive undervaluation, on the other.

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Abstract

Both the level and composition of public expenditures and revenues have implications for economic development, as argued by the ‘fiscal multiplier’ and the ‘quality of public finance’ literature. Public finance decisions also influence the distribution of income. By reviewing the literature, I argue for a fair distribution of income as reflected in low income inequality, not particularly because of the impact of income inequality on long-term growth (which is a controversial issue), but primarily because income inequality typically implies inequality of opportunity. European Union countries have very diverse public finance structures and different levels of effectiveness, and there is room for improvement in growth and equality impacts in all countries. A general guideline would be that the most effective approach comprises progressive taxes and inheritance taxes, spending on education, health and public infrastructure, and better government effectiveness. At the height of the 2008 global and the subsequent European financial and economic crises, the fiscal consolidation strategies of EU countries largely relied on cutting public investment and social spending (except pensions), which is the opposite of what is suggested in the literature. Better fiscal rules and good fiscal institutions are needed to safeguard growth- and distribution friendly expenditures in a crisis.

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In the aftermath of the 2008 financial crisis, the recovery in economic activity has been weak and much of the academic and policy discussions seek to explain this sluggish growth. This literature review presents how the secular stagnation hypothesis re-emerged in 2013 and evolved over time. It identifies its key tenets, its most contentious points and its most important critiques. Secular stagnation has different interpretations, which complicates the debate, and the objective of this paper is to clarify the demarcation lines between various theories and to show how some of them amalgamated over time. The secular stagnation hypothesis links weak growth to a decline in natural interest rates. Most observers agree that natural interest rates have indeed declined over the past decade and may be in negative territory. However, there are diverging views about the factors which led to negative interest rates and how lasting their impact is likely to be. The secular stagnation hypothesis points to various fundamental factors and suggests a long-term effect, while the global savings glut and debt super-cycle concepts assume only a temporary impact and anticipate that global economic growth and real interest rates will eventually rebound.

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The recent electoral success of far-right and far-left parties is often considered to be a side-effect of the economic crisis. This article aims to determine the degree to which the downturn in economic performance helped to increase the vote share of these parties. The research includes a set of 23 EU member states from the period 1995 to 2012, and finds that poor economic performance significantly determined the vote share of the far-left. Among the indicators influencing the far-left electorate were mainly changes in the GDP and unemployment rate. The research does not find any correlation between the far-rights vote share and the development of macroeconomic indicators.

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