nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2006‒05‒27
six papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Chicken or egg: financial development and economic growth in China, 1992-2004 By Fan, Xuejun; Jacobs, Jan; Lensink, Robert
  2. Disparity in Factor Contributions between Coastal and Inner Provinces in Post-reform China By Tung Liu; Kui-Wai Li
  4. Does access to credit improve productivity ? Evidence from Bulgarian firms By Love, Inessa; Gatti, Roberta
  5. Remittances, Institutions and Economic Growth By Natalia Catrinescu; Miguel Leon-Ledesma; Matloob Piracha; Bryce Quillin
  6. Regime changes and monetary stagflation By Edward S. Knotek II

  1. By: Fan, Xuejun; Jacobs, Jan; Lensink, Robert (Groningen University)
    Abstract: This paper contributes to the empirical finance-growth literature by examining the relationship between financial depth, banking sector development, stock market development and economic growth in China. After an extensive survey on recent financial reforms in China, we apply Granger (non-)causality tests for non-stationary variables to examine long-run and short-run causality between economic growth and financial development. We find positive relationships between financial depth, banking sector development and growth. However, stock market development does not seem to have a positive effect on long-run economic growth.
    Date: 2005
  2. By: Tung Liu (Department of Economics, Ball State University); Kui-Wai Li (City University of Hong Kong, Hong Kong SAR)
    Abstract: The paper discusses China’s post-reform regional economic growth imbalance relative to input disparity in technology, physical and human capital. Institutional sources of finance and types of ownership are used to construct physical capital. Technology is measured by investment in innovation, and human capital is constructed from schooling years per capita. The results show that domestic bank loans and foreign-owned enterprises are important in coastal provinces, while state appropriation and state-owned enterprises are important in inner provinces. Technology and foreign investment have a larger impact on output growth in coastal provinces. Human capital is endogenous for coastal provinces, but is exogenous for inner provinces.
    Keywords: Mainland China, regional disparity, physical and human capital, productivity
    JEL: C22 I22 O18 O47 O53 P24
    Date: 2005–06
  3. By: Juan Ignacio Pena; Rosa Rodriguez
    Abstract: This paper presents a model linking two financial markets (stocks and bonds) with the real business cycle, in the framework of the Consumption Capital Asset Pricing Model with Generalized Isoelastic Preferences. Besides interest rate term spread, the model includes a new variable to forecast economic activity: stock market term spread, which constitutes the slope of expected stock market returns. The empirical evidence documented in this paper suggests systematic relationships between the state of the business cycle and the shapes of two yield curves (interest rates and expected stock returns). Results are robust to changes in measures of economic growth, stock prices, interest rates and expectation-generating mechanisms.
    Date: 2006–05
  4. By: Love, Inessa; Gatti, Roberta
    Abstract: Although it is widely accepted that financial development is associated with higher growth, the evidence on the channels through which credit affects growth on the micro-level is scant. Using data from a cross section of Bulgarian firms, the authors estimate the impact of access to credit (as proxied by indicators of whether firms have access to a credit or overdraft facility) on productivity. To overcome potential omitted variable bias of OLS estimates, they use information on firms ' past growth to instrument for access to credit. The authors find credit to be positively and strongly associated with total factor productivity. These results are robust to a wide range of robustness checks.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Investment and Investment Climate,Economic Growth,Financial Intermediation
    Date: 2006–05–01
  5. By: Natalia Catrinescu (European Commission); Miguel Leon-Ledesma (University of Kent); Matloob Piracha (University of Kent and IZA Bonn); Bryce Quillin (World Bank)
    Abstract: There is considerable debate regarding the relative contribution of international migrants’ remittances to sustainable economic development. While the rates and levels of officially recorded remittances to developing countries has increased enormously over the last decade, academic and policy-oriented research has not come to a consensus over whether remittances contribute to longer-term growth by building human and financial capital or degrade long-run growth by creating labor substitution and ‘Dutch disease’ effects. This paper suggests that contradictory findings have emerged when looking at the remittancesgrowth link because previous studies have not correctly controlled for endogeneity. Using Dynamic Data Panel estimates we find that remittances exert a weakly positive impact on long-term macroeconomic growth. The paper also considers the proposition that the longerterm developmental impact of remittances is increased in the presence of sound economic policies and institutions.
    Keywords: international migration, remittances, growth, institutions
    JEL: F22 O15 O47
    Date: 2006–05
  6. By: Edward S. Knotek II
    Abstract: This paper examines whether monetary shocks can consistently generate stagflation in a dynamic, stochastic setting. I assume that the monetary authority can induce transitory shocks and longer-lasting monetary regime changes in its operating instrument. Firms cannot distinguish between these shocks and must learn about them using a signal extraction problem. The possibility of changes in the monetary regime greatly improves the ability of money to generate stagflation. This is true whether the regime actually changes or not. If the monetary regime changes on average once every ten years, stagflation occurs in 76% of model simulations. The intuition for this result is simple: increased output volatility due to learning coupled with inflation inertia produce conditions conducive to the emergence of stagflation. The incidence of stagflation can be reduced by a stable, transparent central bank.
    Keywords: Inflation (Finance) ; Recessions ; Monetary policy
    Date: 2006

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