nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2007‒10‒20
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. The quality of banking and regional growth By Hasan, Iftekhar; Koetter, Michael; Wedow, Michael
  2. Financial fragility, macroeconomic shocks and banks’ loan losses: evidence from Europe By Pesola, Jarmo
  3. Growth, Volatility and Political Instability: Non-Linear Time-Series Evidence for Argentina, 1896-2000 By Campos, Nauro F; Karanasos, Menelaos

  1. By: Hasan, Iftekhar; Koetter, Michael; Wedow, Michael
    Abstract: We test whether output growth in European economic agglomeration regions depends on financial development. To this end we suggest a relative measure of the quality of financial institutions rather than the usual quantity proxy of nancial development. In order to measure the quality of financial development we use profit efficiency derived from stochastic frontier analysis. We show that more efficient banks spur regional growth while the typically used quantity measure of financial development is negligible. Also, our results suggest an additional channel through which better banking can spur growth: the interaction of more credit with efficient banks.
    Keywords: Bank performance, regional growth, bank efficiency, Europe
    JEL: G21 O16 O47 O52
    Date: 2007
  2. By: Pesola, Jarmo (Bank of Finland Research)
    Abstract: This paper tests the hypothesis that the more fragile a banking system is, the more likely it is to experience problems when an unexpected shock hits. The empirical framework where this test is conducted is a reduced form model, where macroeconomic factors explain banks’ loan losses. The dependent variable is the ratio of net loan losses to lending in a panel comprising the banking sectors of nine sample countries. An econometric model is estimated on pooled annual data mostly covering the period from the early 1980s to 2002. There are three separate explanatory terms. Two of these include a surprise change both in incomes and real interest rates. Both form a separate cross-product term with lagged aggregate indebtedness. The lagged dependent variable is the third explanatory term possibly capturing the feedback effect from loan losses back to the real economy. The underlying macroeconomic account that this paper puts forward is that loan losses seem basically to be generated by strong adverse aggregate shocks under high exposure of banks to such shocks. The model has been used in connection with stress testing in the Bank of Finland.
    Keywords: financial fragility; unexpected macroeconomic shock; loan loss; stress test
    JEL: E44 G21
    Date: 2007–10–09
  3. By: Campos, Nauro F; Karanasos, Menelaos
    Abstract: What is the relationship between economic growth and its volatility? Does political instability affect growth directly or indirectly, through volatility? This paper tries to answer such questions using a power-ARCH framework with annual time series data for Argentina from 1896 to 2000. We show that while assassinations and strikes (what we call “informal” political instability) have a direct negative effect on economic growth, “formal” political instability (constitutional and legislative changes) has an indirect (through volatility) negative impact. We also find preliminary support for the idea that while the effects of “formal” instability are stronger in the long-run, those of “informal” instability are stronger in the short-run.
    Keywords: economic growth; political instability; power-ARCH; volatility
    JEL: C14 D72 E23 O40
    Date: 2007–10

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