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This paper uses spectral theory to develop the following two testable hypotheses in a unified framework for the predictions of business-cycle and endogenous growth models: (i) financial development affects only business-cycle volatility; and (ii) shocks affect both business-cycle volatility and long-run volatility of GDP growth. In other words, volatility caused by shocks is more persistent than that caused by financial underdevelopment. We decompose the business-cycle and long-run volatility by the spectral method and then test the hypotheses at the cross-country level. Empirical evidence provides support for both hypotheses. Higher private credit, a bank-based measure of financial development, dampens business-cycle volatility but not long-run volatility. Volatility of shocks, as measured by the volatility of changes in the terms of trade, magnifies both business-cycle and long-run volatility. The results are robust to accounting for endogeneity, a market-based measure of financial development, and an alternative method of volatility decomposition.

The value of the elasticity of substitution between labor and capital (σ) is a crucial assumption in understanding the secular decline in the labor share of income. This paper develops and implements a new strategy for estimating this crucial parameter by combining a low-pass filter with panel data to identify the low-frequency/long-run relations appropriate to production function estimation. Standard estimation methods, which do not filter out transitory variation, generate downwardly biased estimates of 40 percent to 70 percent relative to the benchmark value. Despite correcting for this bias, our preferred estimate of 0.40 is substantially below the Cobb-Douglas assumption of σ = 1.

Central banks in emerging market economies often grapple with understanding the monetary policy response to an inter-sectoral terms of trade shock. To address this, we develop a three sector closed economy NK-DSGE model calibrated to India. Our framework can be generalized to other emerging markets and developing economies. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a grain and vegetable sector. The government procures grain from the grain market and stores it. We show that the procurement of grain leads to higher inflation, a change in the sectoral terms of trade, and a positive output gap because of a change in the sectoral allocation of labor. We compare the transmission of a single period positive procurement shock with a single period negative productivity shock and discuss the implications of such shocks for monetary policy setting. Our paper contributes to a growing literature on monetary policy in India and other emerging market economies.

Purpose - Although the importance of the elasticity of substitution between capital and labour (σ) has been recognized in many areas in economics, this parameter has not received enough attention in economic growth. The purpose of this paper is to review the recent development in the importance of σ in economic growth.Design methodology approach - This paper specifically reviews the possibility of perpetual growth and slowdown, and the asymptotic behaviour of the balanced growth path for different values of σ. It also reviews the determinants of the aggregate σ.Findings - Based on the empirical evidence that the value of σ significantly departs from the Cobb-Douglas value of unity, the paper recommends employing the constant elasticity of substitution (CES) production function in both theoretical and empirical growth research.Originality value - This paper offers a new perspective on the elasticity of substitution between capital and labour due to its evaluation of various factors, methods and approaches.

The extreme hunger and deprivation that recurs every year in the lean season in northern Bangladesh, locally known as the Monga, is mainly due to the malfunctioning local labor and credit markets. Using data covering 5600 extreme poor households in the Monga-prone region, we investigate in detail the role of social capital in securing employment and obtaining informal loans. Correcting for the endogeneity of social capital by the heteroscedasticity-based method proposed by Klein and Vella (J Econom 154:154–164, 2010) and also by the standard IV method for a robustness check, we document that social capital plays an important role in obtaining both wage- and self-employment. We also document a weak negative effect of social capital on obtaining informal loans. We explain our results in terms of the role of horizontal and vertical components of our measures of social capital in influencing different outcomes.

Volatility persistence has important welfare consequences. In this paper, we investigate the effect on volatility persistence of the frequency of shocks for which we consider exogenous natural disasters. We find that, on average, volatility persistence is about 5 percent lower in countries that have experienced one more natural disasters per year. However, there is a non-linearity in that volatility persistence initially decreases and then increases with the frequency of natural disasters. The results are explained in terms of disaster resilience—countries that experience natural disasters frequently develop resilience that shields the economy from the destruction of natural disasters and/or expedites economic recovery. Among the factors that potentially create resilience, we find significance of its structural component.

This paper revisits the empirical relationship between volatility and long-run growth, but the key contribution lies in decomposing growth volatility into its business-cycle and trend components. This volatility decomposition also accounts for enormous heterogeneity among countries in terms of their long-run growth trajectories. We identify a negative effect of trend volatility, which we refer to as long-run volatility, on growth, but no effect of business-cycle volatility. However, if long-run volatility is omitted, there would be a spurious (negative) effect of business-cycle volatility. Our results draw attention to a crucial question about different volatility measures and their implications in macroeconomic analyses.

We study the return on private capital across 88 countries for 1970-2014. The return on private capital has exhibited two phases, approximately constant from 1970-1990, but then rising dramatically from 1991-2014. This latter increase occurs for both Rich/Developed and Poor/ Developing countries, though at an uneven pace; the Lucas Paradox seems to have become more pronounced in recent years. Despite falling real interest rates lowering the returns on private capital, 60% of the secular rise in the returns in poor countries is explained by rising equity risk, depreciation, and markups and by the capital loss from expected decreases in the relative price of new capital. These same factors explain 163% of the secular rise in the returns of private capital in rich countries (i.e., the factors rise more than the returns). Policy implications are discussed.

The groups deliberately formed by nongovernmental organizations to organize the poor for their development are often subgrouped for better performance. In this connection, the study investigates the extent subgroups contribute to group performance, the mechanisms that lead to the contribution of subgroups to group performance, and changes in the contribution of subgroups to the performance of a group. Altogether 239 Bangladesh Rural Advancement Committee groups, i.e., village organizations (VOs), with and without subgroups were investigated. The VOs with subgroups performed better than those without subgroups. The performance of the VOs with subgroups, however, declined over time. One of the reasons why effectiveness of VOs with subgroups declined was the belief that pursuing subgroup responsibilities would not bring any personal gain for members. Les groupes délibérément formés par les ONG pour organiser les pauvres dans leur développement sont souvent structurés en des sous-groupes pour des raisons d'efficacité. Dans cette optique l'étude examine: la mesure dans laquelle les sous-groupes contribuent à l'efficacité de groupe; les facteurs qui concourent à améliorer la contribution des sous-groupes à l'efficacité de groupe, et les évolutions de cette contribution au fil du temps. Au total 239 groupes BRAC, i.e., organisations de village (OV), avec ou sans sous-groupes ont été étudiés. Les OV avec sous-groupes ont montré de meilleures performances que celles sans sous-groupes. La performance des OV avec sous-groupes a cependant décliné progressivement. L'une des raisons pour lesquelles l'efficacité des OV avec sous-groupes a décliné fut la croyance selon laquelle prendre des responsabilitiés au sein de sous-groupes n'apporterait aucun gain personnel à ses membres. Die Gruppen, die bewusst von NGOs geformt wurden, um die Armen für deren Entwicklung zu organisieren, werden oft um besserer Leistungsfähigkeit willen in Untergruppen aufgeteilt. In diesem Zusammenhang untersucht die Studie den Umfang, in dem Untergruppen zur Leistung der Gruppe beitragen, Mechanismen, die Beiträge von Untergruppen fördern und Veränderungen des Beitrags von Untergruppen zur Leistung einer Gruppe. Insgesamt wurden 239 BRAC-Gruppen, d.h. Dorforganisationen (village organizations – VOs), mit und ohne Untergruppen, untersucht. Die VOs mit Untergruppen waren leistungsfähiger als die ohne Untergruppen. Die Leistung der VOs mit Untergruppen nahm jedoch im Zeitverlauf ab. Einer der Gründe weshalb die Wirksamkeit von VOs mit Untergruppen abnahm, war die Überzeugung, dass Untergruppenverantwortung keinerlei persönlichen Gewinn für Mitglieder erbringt. Los grupos deliberadamente formados por ONGs para organizar a los pobres para su desarrolo a menudo son subagrupados para un major funcionamiento. En este sentido, el estudio investiga hasta que punto los subgrupos contribuyen al funcionamiento del grupo; los mecanismos que conducen a la contribución de los subgrupos al funcionamiento del grupo; y los cambios en la contribución de los subgrupos al funcionamiento de un grupo. Los 239 grupos \"BRAC\"—por ejemplo-organizaciones de pueblo (VO), se investigan con o sin subgrupo. Las VO con subgrupos funcionan mejor que aquellas sin subgrupo. La actuación de las VO con subgrupo, sin embargo, disminuyó con el tiempo. Una de las razones de porqué la efectividad de las VO con subgrupo disminuyó fue la creencia de que ejercer responsabilidades del subgrupo no traería ningún beneficio personal para los miembros.

Financial inclusion is one of the key factors contributing to household welfare. We explore this effect in China utilizing a unique household survey panel data. Financial inclusion is measured by owning a transaction account at formal financial institutions. We employ an innovative method of heteroscedasticity-based identification recently developed by Klein and Vella (2009a; 2010) to identify the causal effect of financial inclusion. We find that welfare effects of financial inclusion varied across urban and rural areas and income groups. Financial inclusion significantly increased overall consumption, but the impact was greater among urban than rural households. The effect was stronger in the case of food consumption. Financial inclusion also decreased consumption inequality but only among urban households. The uneven effect of financial inclusion across level of urbanization and commodity types have important policy implications for promoting financial inclusion not only in China but also in other developing countries.