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- Functional income distriibution in a small European country: the role of financialisation and other determinantsPublication . Barradas, Ricardo; Lagoa, SérgioThis paper provides an empirical analysis of the relationship between the labour income share and financialisation, as well as other related variables in Portugal from 1978 to 2012. We estimate an equation for the labour share that includes standard variables (technological progress, globalisation, education and business cycle) and variables to capture the effect of financialisation. We formulate the hypothesis that the financialisation process may lead to a rise in the inequality of functional income distribution through three channels: the change in the sectoral composition of the economy (due to both the increase in the weight of financial activity and the decrease in government activity), the diffusion of shareholder value governance practices and the weakening of trade unions. Our results show that the financialisation process has an indirect long-term effect on the labour share through its impact on government activity and trade union density. The paper also finds evidence supporting the traditional explanations for functional income distribution, namely globalisation, education and business cycle.
- Functional income distribution in portugal: the role of financialisation and other related determinantsPublication . Barradas, Ricardo; Lagoa, SérgioThis paper provides an empirical analysis of the relationship between the labour income share and financialisation, as well as other related variables in Portugal from 1978 to 2012. We estimate an equation for the labour share that includes standard variables (technological progress, globalisation, education and business cycle) and variables to capture the effect of financialisation. We formulate the hypothesis that the financialisation process may lead to a rise in the inequality of functional income distribution through three channels: the change in the sectoral composition of the economy (due to both the increase in the weight of financial activity and the decrease in government activity), the diffusion of shareholder value governance practices and the weakening of trade unions. Our results show that the financialisation process has an indirect long-term effect on the labour share through its impact on government activity and trade union density. The paper also finds evidence supporting the traditional explanations for functional income distribution, namely globalisation, education and business cycle.
- Financialisation and real investment in the European Union: beneficial or prejudicial effects?Publication . Barradas, RicardoThis article presents an empirical analysis of the relationship between financialisation and real investment for non-financial corporations using panel data composed of 27 European Union countries over 19 years (1995 to 2013). On the one hand, financialisation leads to a rise in financial investments, diverting funds from real investments (‘crowding out’ effect); on the other, pressures from shareholders to intensify financial payments restrict the funds available for new real investments. We estimate an aggregate investment equation with the traditional variables (lagged investment, profitability, debt, cost of capital, corporate savings and output growth) and two further measures of financialisation (financial receipts and financial payments). The findings demonstrate that financialisation has damaged real investment in European Union countries, mainly through the channel of financial payments, either by interest or dividend payments. It is also found that the prejudicial effects of financialisation on investment were more severe in the pre-2007 crisis period. It is concluded that financialisation contributed to a slowdown of real investment by 1 to 8 per cent in the full and pre-crisis period, respectively. During the pre-crisis period, financialisation was the main driver of the slowdown of investment in the European Union.
- Drivers of private consumption in the era of financialisation: new evidence for the European Union countriesPublication . Barradas, RicardoThis paper provides an empirical assessment of the effects of financialisation on private consumption using panel data for all 28 European Union countries from 1995 to 2015. According to the post Keynesian literature, financialisation exerts two contradictory effects on private consumption, notably a negative one linked to the fall of households’ labour income and a positive one related to the increase of households’ (financial and housing) wealth. A private consumption equation was estimated by including three variables linked to financialisation (labour income, financial wealth and housing wealth) and five additional control variables (lagged private consumption, short-term interest rate, long-term interest rate, inflation rate and unemployment rate). Our results confirm that financialisation has been detrimental to private consumption in the EU countries as a whole, and more specifically in the Euro area countries, as the beneficial wealth effect has not been sufficient to compensate for the prejudicial income effect. The fall of households’ labour income has even been the highest constraint on private consumption in the Euro area countries
- Evolution of the financial sector – three different stages: repression, development and financialisationPublication . Barradas, RicardoThis paper makes a systematic literature review on the evolution of the financial sector in the last decades all over the world, but especially in the more developed countries. This evolution was marked by three different stages, reflecting different impacts of the financial sector on the real economy and on society. The first stage – financial repression – is characterised by the existence of several regulations and restrictions on the financial sector, which proved to be detrimental to support economic growth. This legitimised the financial liberalisation and deregulation of the financial sector in the recent years, representing the second stage – financial development. Consequently, there was a strong growth of the financial sector in subsequent years, originating an excessive financial deepening and casting doubts around the advantages provided by the financial sector. In fact, excessive financial deepening weakened or reversed the relationship between savings and investments. The large growth of the financial sector and its deleterious effects are commonly referred as financialisation, constituting the third stage. The paper concludes that it is necessary to engage in a fourth stage in the coming years – de-financialisation – in order to re-establish a more supportive relationship between the financial sector and economic growth and presents several policy recommendations around this matter.
- Financialisation in the european periphery and the sovereign debt crisis: the portuguese casePublication . Barradas, Ricardo; Lagoa, Sérgio; Leão, Emanuel; Mamede, RicardoThe financial sector has acquired great prominence in most developed economies. However, some authors argue that the growth of finance is at the root of the current financial and economic difficulties. This paper aims to analyse this claim by looking at financialisation in the European periphery, focusing on the Portuguese case. The emergence of this phenomenon is contextualised from a historical, economic and international perspective. Based on the analysis of several indicators, the paper concludes that the Portuguese economy exhibits symptoms of financialisation, and that this has not only revealed the structural weaknesses of the Portuguese economy but also played an important role in the emergence of the recent Portuguese sovereign debt crisis.
- Financialisation and the fall in the labour share: a panel data econometric analysis for the European Union countriesPublication . Barradas, RicardoThis paper conducts an empirical analysis of the relationship between financialisation and the labour share using panel data composed of 27 European Union countries over 19 years (from 1995 to 2013). Adopting a Kaleckian perspective, framed in the post-Keynesian literature, financialisation exerts a negative influence on the labour share through three different channels: the change in the sectorial composition of economies (the increasing importance of financial activity and the decreasing importance of general government activity), the proliferation of ‘shareholder value orientation’ and the deterioration of general workers’ bargaining power. We estimate a labour share equation with the traditional variables (lagged labour share, technological progress, globalisation, education and output growth) and four further measures of financialisation (financial activity, general government activity, ‘shareholder value orientation’ and the trade union density rate). The findings show a disruptive relationship between financialisation and the labour share in European Union countries, mainly through the channels of general government activity and ‘shareholder value orientation’. It is also found that financialisation has contributed to a fall in the labour share in European Union countries as a whole and more specifically in non-euro area countries, ‘bank-based’ countries and ‘coordinated market’ countries. The slowdown of output was the main driver of the fall in the labour share in European Union countries, a trend that could persist in the future taking into account the fears of potential ‘secular stagnation’ in the current era of financialisation.
- Risk management, the subprime crisis and financialisation: the role of risk management in the generation and transmission of the subprime crisisPublication . Barradas, Ricardo; Lagoa, Sérgio; Leão, EmanuelOver time the financial sector has gained greater relevance in the economy, a phenomenon that some call financialisation. Contrary to the mainstream view, financialisation literature emphasises that risk management by financial corporations will not be socially efficient in a context of deregulated markets and will ultimately lead to an increase of aggregate risk and crises. To assess the validity of such claim, in this paper we review the literature on risk management during the Subprime crisis. These failures fall into three categories: technique and methodology, corporate governance and strategy, and regulation and external factors. These failures can be interpreted in the light of the financialisation perspective, which is therefore a valuable approach when addressing regulatory changes in the financial system.
- Financialisation and Real Investment in the European Union Using a Country-Level Analysis: Beneficial or Prejudicial Effects?Publication . Barradas, RicardoThis paper makes an empirical assessment of the relationship between financialisation and real investment by non-financial corporations using panel data composed of 27 European Union countries over 19 years (from 1995 to 2013). On one hand, financialisation leads to a rise in financial investments, deviating funds from real investments (“crowding out” effect). On the other, pressures from shareholders to intensify financial payments restrict the funds available for new real investments. We estimate an aggregate investment equation with the traditional variables (profitability, debt, cost of capital, savings rate and output growth) and two further measures of financialisation (financial receipts and financial payments). Findings show that financialisation has damaged real investment in European Union countries, mainly through the channel of financial payments either in interest or dividend payments. It is also found that the prejudicial effects of financialisation in investment are more marked in more financialised countries. In addition, it is concluded that debt has a harmful effect on real investment as the increasing levels of non-financial corporations' indebtedness prevent the use of new debts to finance real investments.
- The Long Boom and the Early Bust: The Portuguese Economy in the Era of FinancialisationPublication . Barradas, Ricardo; Mamede, Ricardo; Lagoa, Sérgio; Leão, EmanuelThis chapter expands the authors’ previous work on the Portuguese financial system’s evolutions in the past three decades. In that work they extensively documented the various signs of financialisation in the Portuguese economy. Now the authors focus on the effects of financialisation in Portugal on the long-run macroeconomic development and on the financial and economic crises that hit the country in recent years. The chapter is divided in four main sections. Section 11.2 discuss the main features of the development of the Portuguese economy since the early 1980s. Section 11.3 builds an analysis by looking in greater detail at four different channels through which financialisation affects the evolution do the Portuguese economy: income distribution, investment in capital stock, private consumption and the current account. Section 11.4 addresses the crisis and section 11.5 presents the conclusions.