nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2006‒09‒23
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Local Financial Development and the Aid-Growth Relationship By Nkusu, Mwanza; Sayek, Selin
  2. Stock Market Development and Economic Growth: A Matter of Information Dynamics By Salvatore Capasso
  3. Development Aid and Economic Growth: A Positive Long-Run Relation By Sanjay G. Reddy; Camelia Minoiu

  1. By: Nkusu, Mwanza; Sayek, Selin
    Abstract: With official development assistance (ODA) set to rise as countries strive to meet the Millennium Development Goals (MDGs), aid effectiveness remains an important area of development policy. An increasing number of studies support the notion that ODA can contribute to growth in a nonlinear relationship. In this paper, we investigate a new hypothesis regarding this relationship: that deeper financial markets in aid-recipient countries facilitate the management of aid flows, thereby enhancing aid effectiveness. An empirical analysis, using a panel data set, finds robust support for the hypothesis.
    Keywords: Foreig d, economic growth, poverty, and financial development
    JEL: F35 I30 O40 O50
    Date: 2006
  2. By: Salvatore Capasso (Università di Napoli "Parthenope" and CSEF)
    Abstract: The aim of this paper is to provide further insights into the linkages between stock market development and economic growth. When it is not possible to distinguish between investment projects with different rates of return, market valuation of those projects is an “average value” reflecting the expected return across all investment opportunities. Consequently, as in a typical lemon’s market, higher return projects are penalised since they attract lower than fair prices. This informational cost, or dilution cost, depends on the degree of informational asymmetry in the market, as well as on the type of financial contract issued by the firm to finance those projects – typically, equity or debt. On this basis, we interpret the development of stock market as the result of a change in the level of informational costs which decrease with capital accumulation and induce firms to switch from debt financing to a less costly equity financing.
    Keywords: Credit Markets, Economic Growth, Information Asymmetries, Stock Markets
    JEL: O16 O40 G10
    Date: 2006–09–01
  3. By: Sanjay G. Reddy; Camelia Minoiu
    Abstract: We analyze the growth impact of official development assistance to developing countries. Our approach is different from that of previous studies in two major ways. First, we disentangle the effects of two components of aid: a developmental, growth-enhancing component, and a geopolitical, possibly growth-depressing component. Second, our specifications allow for the effect of aid on economic growth to occur over long time-lags. Our results indicate that developmental aid promotes long-run growth. The effect is large and robustly significant, and withstands an array of robustness checks including alternative specifications, choices of the proxy for development aid, and treatments of outliers.
    Keywords: official development assistance, economic growth
    JEL: O1 O2 O4
    Date: 2006–09

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