nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2007‒01‒13
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Endogenous Financial Development and Industrial Takeoff By Alex William Trew
  2. Decomposing the Effects of Financial Liberalization: Crises vs. Growth By Romain Ranciere; Aaron Tornell; Frank Westermann
  3. Financial Constraints on Investment in an Emerging Market Crisis: An Empirical Investigation of Foreign Ownership By Garrick Blalock; Paul Gertler; David I. Levine

  1. By: Alex William Trew
    Abstract: There is a large and growing literature on the relationship between financial development and economic growth. It suggests a positive causal link running from finance to growth. We consider, in broad terms, the existing historical evidence on this connection. We demonstrate that constraints on investment finance occur primarily in the presence of fixed costs. Investments in physical transport infrastructures are prime examples of projects in which financial constraints can retard industrial growth. Furthermore, an appreciation of spatial and dynamic elements is central: Infrastructure development was privately financed by spatially concentrated coalitions of modest investors. We contrast the institutional environment in Britain with that in continental Europe. We develop a theory of finance and growth that can account for the disaggregated and dynamic nature of the finance and development of infrastructure.
    Keywords: finance and growth, endogenous growth, economic integration, economic history.
    JEL: O11 O16 O40 N23
    Date: 2007–01
  2. By: Romain Ranciere; Aaron Tornell; Frank Westermann
    Abstract: We present a new empirical decomposition of the effects of financial liberalization on economic growth and on the incidence of crises. Our empirical estimates show that the direct effect of financial liberalization on growth by far outweighs the indirect effect via a higher propensity to crisis. We also discuss several models of financial liberalization and growth whose predictions are consistent with our empirical findings.
    JEL: F3 F32 F33 F36 F43 O4
    Date: 2006–12
  3. By: Garrick Blalock (Cornell University); Paul Gertler (University of Caifornia, Berkeley and NBER); David I. Levine (Haas School of Business, UC Berkeley)
    Abstract: JEL classification codes: O16, F23, E32, O12Abstract:We investigate whether capital market imperfections constrain investment during an emerging market financial crisis. Both large currency devaluations and widespread collapse of the banking sector characterize recent crises. Although a currency devaluation should increase exporters' competitiveness and investment, a failing banking system may limit credit to these firms. Foreign-owned firms, which have greater access to overseas financing but otherwise face the same investment prospects, provide an ideal control group for determining the effect of liquidity constraints. We test for liquidity constraints in Indonesia following the 1997 East Asian financial crisis, a period when the issuance of new domestic credit declined rapidly. Exporters' value added and employment increased after the crisis, suggesting that they profited from the devaluation and had sufficient cash flow to finance more workers. However, only exporters with foreign ownership increased their investment significantly. The failure of domestic firms to invest under profitable conditions suggests that they may have faced liquidity constraints. Investment by foreign-owned firms increased post-crisis capital stock by about 4% more than would have occurred if all the firms were domestically owned.
    Keywords: Liquidity Constraints, Foreign Direct Investment, Financial Crisis, Indonesia,
    Date: 2006–06–27

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