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

• Published in: Economic modelling 2017-04, Vol.62, p.103-123
• Main Authors: Marchiori, Luca, Pierrard, Olivier
• Format: Article
• Language: English
• Subjects: Financial multiplier; General equilibrium model; Long run evolution
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2016.12.020

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. •A 1 € increase in the financial sector value added increases output by 2.1 €.•Drivers are net exports (expenditure approach) or capital income (income approach).•In a longer horizon, private investment is also stimulated.•Results may also be relevant for other international financial centers.•Effects of global demand on non financial centers are left for future research.