nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2006‒10‒28
two papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial Structure and Macroeconomic Volatility: Theory and Evidence By Huizinga, Harry; Zhu, Dantao
  2. Institutional development, financial deepening and economic growth: Evidence from China By Hasan, Iftekhar; Wachtel , Paul; Zhou, Mingming

  1. By: Huizinga, Harry; Zhu, Dantao
    Abstract: This paper presents a simple model capturing differences between debt and equity finance to examine how financial structure matters for macroeconomic volatility. Debt finance is relatively cheap in the sense that debt holders need to verify relatively few profitability states, but debt finance may lead to costly bankruptcy. At the aggregate level, a more debt-based financial structure leads to a higher bankruptcy rate. Therefore, aggregate output is more variable in case of a heavy reliance on debt finance. This paper provides empirical evidence that countries with more equity finance have a lower variance of GDP and a lower probability of episodes of negative economic growth.
    Keywords: bankruptcy costs; financial structure; macroeconomic volatility
    JEL: C24 E32 E44 G33
    Date: 2006–06
  2. By: Hasan, Iftekhar (BOFIT); Wachtel , Paul (BOFIT); Zhou, Mingming (BOFIT)
    Abstract: There have been profound changes in both political and economic institutions in China over the last twenty years. Moreover, the pace of transition has led to variation across the country in the level of development. In this paper, we use panel data for the Chinese provinces to study the role of legal institutions, financial deepening and political pluralism on growth rates. The most important institutional developments for a transition economy are the emergence and legalization of the market economy, the establishment of secure property rights, the growth of a private sector, the development of financial sector institutions and markets, and the liberalization of political institutions. We develop measures of these phenomena, which are used as explanatory variables in regression models to explain provincial GDP growth rates. Our evidence suggests that the development of financial markets, legal environment, awareness of property rights and political pluralism are associated with stronger growth.
    Keywords: economic growth; institutions; financial markets; China
    JEL: O16 O53 P14 P16
    Date: 2006–10–05

This nep-fdg issue is ©2006 by Iulia Igescu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.