Nobel laureate Abhijit Banerjee on macroeconomic volatility’s impact on productivity growth

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New Delhi, Oct 15 | It has long been recognised that productivity growth and the business cycle are closely interrelated. Yet, until recently, the two phenomena have been investigated separately in the literature on economics.

“Volatility and Growth” (Oxford University Press), co-authored by Nobel Economics laureate Abhijit Banerjee and Philippe Aghion, provides the first consistent attempt to analyse the effects of macroeconomic volatility on productivity growth, and also the reverse causality from growth to business cycles.

The authors show that by looking at the economy through the lens of private entrepreneurs, who invest under credit constraints, one can go some way towards explaining persistent macroeconomic volatility and the effects of volatility on growth.

Beginning with an analysis of the effects of volatility on growth, the authors argue that the lower the level of financial development in a country the more detrimental the effect of volatility on growth. This prediction is confirmed by cross-country panel regressions.

The data also suggests that a fixed exchange rate regime or more countercyclical budgetary policies are growth-enhancing in countries with a lower level of financial development. The former reduce aggregate volatility whereas the latter reduce the negative effects of volatility on long-term productivity-enhancing investment by firms.

The book concludes with an investigation into how the interplay between credit constraints and pecuniary externalities is sufficient to generate persistent business cycles and to explain the occurrence of currency crises.

Another book, “Understanding Poverty” (Oxford University Press), edited by Abhijit Banerjee, Roland Benabou, Dilip Mookherjee, brings together 28 essays by some of the world leaders in the field, who were invited to tell the lay reader about the most important things they have learnt from their research that relate to poverty.

The essays cover a wide array of topics: the first essay is about how poverty gets measured. The next section is about the causes of poverty and its persistence, and the ideas range from the impact of colonialism and globalization to the problems of “excessive” population growth, corruption and ethnic conflict.

The next section is about policy: how should we fight poverty? The essays discuss how to get drug companies to produce more vaccines for the diseases of the poor, what we should and should not expect from micro-credit, what we should do about child labour, how to design welfare policies that work better and a host of other topics.

The final section is about where the puzzles lie: what are the most important anomalies, the big gaps in the way economists think about poverty? The essays talk about the puzzling reluctance of Kenyan farmers to fertilizers, the enduring power of social relationships in economic transactions in developing countries and the need to understand where aspirations come from, and much else.

Every essay is written with the aim of presenting the latest and the most sophisticated in economics without any recourse to jargon or technical language.

Source: IANS

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