nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2007‒08‒27
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Finance-Growth Linkage and Risk Diversification. Evidence from OECD Countries By Franz R. Hahn
  2. Are Financial Sector Policies Effective in Deeping the Malaysian Financial System By James B. Ang
  3. Investment during the Korean Financial Crisis: A Structural Econometric Analysis By Simon Gilchrist; Jae W. Sim

  1. By: Franz R. Hahn (WIFO)
    Abstract: Empirical evidence is increasingly emphasising the positive influence of financial markets on the level and the rate of growth of a country's per-capita income. Theoretically, the rationale for the finance-growth nexus appears to be straightforward: in imperfect economies, financial markets provide valuable services such as mobilising savings, diversifying risks, allocating savings to investments, and monitoring the allocation of managers. By performing these services financial markets work as a very important catalyst of economic growth. However, little insight has so far been provided by empirical research as to which of these financial services is most critical for economic growth. Using a panel data set covering 20 OECD countries over the period 1970 through 2000 we present empirical evidence which suggests that the finance-growth nexus in industrialised countries be significantly strengthened by the improvement of risk management and risk diversification made possible by financial innovation and advancement.
    Keywords: economic growth, risk management, risk diversification, financial innovation, panel analysis
    Date: 2006–10–18
  2. By: James B. Ang
    Abstract: This paper provides an empirical assessment of the effects of financial sector policies on development of the financial system in Malaysia over the period 1959-2005. The technique of principal component analysis is used to construct a summary measure of interest rate policies in order to account for the joint influence of various interest rate controls imposed on the Malaysian financial system. The results show that economic development, interest rate controls and capital liquidity requirements positively affect the level of financial development. However, higher statutory reserve requirements and the presence of directed credit programs appear to be harmful for development of the Malaysian financial system. The results provide some support to the argument that some form of financial restraints may help promote financial development.
    Keywords: Financial development, financial liberalization, Malaysia
    JEL: E44 E58 O16 O53
    Date: 2007–06
  3. By: Simon Gilchrist; Jae W. Sim
    Abstract: This paper uses firm-level panel data to analyze the role of financial factors in determining investment outcomes during the Korean financial crisis. Our identification strategy exploits the presence of foreign-denominated debt to measure shocks to the financial position of firms following the devaluation that occurred during the crisis period. Structural parameter estimates imply that financial factors may account for 50% to 80% of the overall drop in investment observed during this episode. Our estimates also imply that foreign-denominated debt had relatively little effect on aggregate investment spending. Counterfactual experiments suggest sizeable contractions in investment through this mechanism for economies that are more heavily dependent on foreign-denominated debt however.
    JEL: E22 E44 F34 G31
    Date: 2007–08

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