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How does global demand for financial services promote domestic growth in Luxembourg? A dynamic general equilibrium analysis

Luca Marchiori () and Olivier Pierrard ()

Economic Modelling, 2017, vol. 62, issue C, 103-123

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.

Keywords: General equilibrium model; Long run evolution; Financial multiplier (search for similar items in EconPapers)
JEL-codes: D91 E24 E62 F41 J11 (search for similar items in EconPapers)
Date: 2017
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