The Relationship between the Nominal and Real Economy:Evidence from Three Macroeconomic Studies


Student thesis: Doctoral Thesis

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Award date11 Jul 2019


This thesis consists of five chapters investigating the relationship between the nominal and real economy through three macroeconomic empirical studies.

Chapter 1 presents the literature review on various studies related to the discussion on the relationship between nominal and real economy.

Chapter 2 documents the impact of liquidity on total factor productivity using provincial level data from post-reform China. A loose financial policy including the provision of loans and fiscal subsidies to state-owned enterprises and households has long been practiced in China, although financial liberalization since the 1980s has revitalized banks and other institutions. Furthermore, in order to maintain the annual growth rate of GDP above 9% after the 2007/08 global financial crisis, the Chinese government introduced a four trillion stimulus package to boost investment and promote economic growth in 2009. Despite China’s rapid growth in the last few decades, this chapter argues that China’s “cash richness” merely led to expansion in its money supply but not its effectiveness. This empirical study reveals that China’s credit misallocation hindered its TFP growth and, eventually, caused it to decline.

First, we find that China’s TFP growth rate experienced a dramatic decrease after 2008. When subsidies are taken into consideration in studying TFP growth in different provinces, the empirical results are mixed but tend to suggest that their provision has a significant positive effect on the TFP growth rate. Second, the empirical results demonstrate the role of excess liquidity - the estimates indicate a negative effect of liquidity on TFP growth in the full sample and sub-samples. Third, we infer that the increase in liquidity would lead to TFP losses because of the resource misallocation between the state and non-state sectors. In sum, this chapter provides empirical results relating to the effect of excess liquidity on credit misallocation and the decline of the total factor productivity in China.

Chapter 3 presents an empirical work about the influence of oil revenues on total factor productivity. Oil resources and total factor productivity are interpreted as the proxies for the nominal economy and real economy, respectively, and are used to study the impact of oil revenues on economic productivity.

First, we study the relationship between crude oil exports and TFP growth in a sample that includes data from 132 countries from 1970 to 2014. We use a dynamic panel model with distributed lags to evaluate the impact of oil revenue shocks on the TFP growth rate and provide an explanation for the natural resource curse – oil price shocks could be the reason underlying the negative impact of oil resources on productivity.

Second, based on the trading volume of crude oil, we divide the global economy into three groups of countries: oil exporting countries, oil importing countries, and countries that experienced both export and import of oil. Data on oil exports, oil imports, and net oil exports are, respectively, used for these three groups of countries in the empirical study to examine if oil as a financial resource could contribute positively to productivity and growth. The empirical results show that, despite decades of oil exports and the large oil revenues amassed, oil revenues as a financial resource is unproductive and there is a significant negative relationship between oil exports and TFP in both system-GMM and nonparametric estimations. Further, the oil revenue shock could be a potential explanation for the negative impact of oil resources on productivity. The greater volatility of the oil price would lead to more oil revenue shock and eventually result in a decline in total factor productivity.

Third, for the “resource-poor” oil importing countries, the empirical results demonstrate a significant negative relationship between oil imports and productivity growth. This suggests that resource-poor countries could suffer from a lack of natural resources. High oil prices take up other sources of finance and hence restrict growth and development potential in the real economy.

In Chapter 4, we investigate the relationship between the interest rate and investment from some novel perspectives. Interest rates in major economies including Europe, Japan, the US and UK have declined since the 1990s and have reached a near-zero rate since the global financial crisis. However, the implementation of a low interest rate policy for almost ten years after the financial crisis failed to restore the world economy to a pre-crisis state – the European and Japanese economies, for instance, are still in deep recession. Several scholars argue that the slow recovery from the financial crisis was due to weak investment in both advanced economies and developing countries.

In this chapter, we focus on the effect of ultra-low interest rates on investment from a macroeconomic perspective and consider data from 115 countries from 1980 to 2018. The benchmark regression results reveal a significant negative relationship between the interest rate and investment – a result that is consistent with the traditional Keynesian hypothesis. However, when dummy variables and interaction terms are used to control for the ultra-low-interest rate environment, the findings reveal that a lowering interest rate can have an adverse effect on investment, instead of enhancing it when the interest rate was set below a certain threshold. We investigate whether the low interest rate would promote speculation in stock markets or real fixed investment. The empirical results indicate that, under the low interest rate circumstance, the stock market trading volume and speculative trading increased while real physical investment decreased.

Chapter 5 draws the conclusions of the whole study.