How does global demand for financial services promote domestic growth in Luxembourg? A dynamic general equilibrium analysis |
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Institution: | 1. IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France;2. Department of Economics, European University Institute (EUI), Via della Piazzuola, 43, I-50133, Florence, Italy;3. Athens University of Economics and Business, Greece;4. Department of Finance and Economics, Champagne School of Management, Groupe ESC Troyes en Champagne, 217, Av. Pierre, Brossolette, CS 20710, 10002 Troyes, France;5. IRG, Université Paris-Est Créteil Val de Marne (UPEC), Place de la Porte des Champs, 4 Route de Choisy, 94010 Créteil, France |
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Abstract: | This paper studies the transmission of a change in the global demand for financial services on the domestic growth of an international financial center. To capture most of the possible interactions, we develop a dynamic general equilibrium model that we calibrate on Luxembourg data. Results show that the financial multiplier (ratio of a change in output to a change in the financial sector value added) is above 2 in the medium run and largely above 1 in the long run. The main transmission channels are net exports (expenditure approach) or capital income (income approach) in the medium run and investment in the long run. Moreover, the global demand for financial services has substantial implications for public finances. These findings also mean that a sudden loss of confidence towards a specific international financial center might have dramatic consequences for its whole economy. |
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Keywords: | General equilibrium model Long run evolution Financial multiplier |
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