nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2008‒11‒25
four papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Imbalances in China and U.S. Capital Flows By Tatom, John
  2. What does a financial system say about future economic growth? By Grabowski, Szymon
  3. Internal Finance and Growth: Microeconometric Evidence on Chinese Firms By Guariglia, Alessandra; Liu, Xiaoxuan; Song, Lina
  4. Postwar Slowdowns and Long-Run Growth: A Bayesian Analysis of Structural-Break Models By Yi-Chi Chen; Eric Zivot

  1. By: Tatom, John
    Abstract: China’s major imbalances include trade and capital account surpluses and a large annual build-up of international reserves. China has a capital account surplus reinforcing the accumulation of foreign exchange reserves, mainly U.S. dollar-denominated assets. Usually, a sustainable fixed or floating exchange rate system requires that a country with a large current account surplus run a capital account deficit. The U.S. is widely criticized for having a comparable trade deficit that mirrors, to a large extent, China’s surplus and for its dependence on large capital inflows including from China. There is political pressure for protectionism and for China to implement wasteful economic policies to reduce the surplus. Negative consequences of China’s imbalances include the build-up of large, low-return foreign exchange, leading to rapid growth in money and credit and to a sharp acceleration in inflation. Moreover, efforts to offset money growth and inflation have deepened inefficiencies in the financial system, which China had hoped to remedy by its efforts to recapitalize and list its banks’ equities on stock exchanges. China could eliminate these imbalances by policies that would reduce growth. One solution is to lift restrictions on capital outflows, allowing households and business to diversify their wealth holdings and realize higher returns and/or less volatility in their income and wealth. This would transform future asset growth to holdings of higher return, lower risk assets abroad and also would eliminate pressures on the People’s Bank of China, allowing for more rapid deregulation of banks, slower money and credit growth and lower inflation. The U.S. is already adjusting to these imbalances as the current account deficit began to decline in 2005 and the dollar has fallen dramatically. Unfortunately, such adverse developments are coming from political pressures to raise taxes, especially on capital resources income, and from protectionist policies, both of which are slowing growth in the U.S.
    Keywords: Capital account imbalance; capital controls and banking inefficiencies; capital outflows and financial development; exchange rate management; banking regulation
    JEL: F42 E58 G15
    Date: 2008–09
  2. By: Grabowski, Szymon
    Abstract: In many research studies it is argued that it is possible to extract useful information about future economic growth from the performance of financial markets. However, this study goes further and shows that it is not only possible to use expectations derived from financial markets to forecast future economic growth, but that data about the financial system can be used for this purpose as well. The research is conducted for the Polish emerging economy on the basis of monthly data. The results suggest that, based purely on the data from the financial system, it is possible to construct reasonable measures that can, even for an emerging economy, effectively forecast future real economic activity. The outcomes are proved by two various econometric methods, namely, by a time series analysis and by a probit model. All presented models are tested in-sample and out-of-sample.
    Keywords: CCAPM; economic growth; financial markets; term spreads; expectations; forecasting
    JEL: E43 G12 E44
    Date: 2008–09–12
  3. By: Guariglia, Alessandra (University of Nottingham); Liu, Xiaoxuan (Chinese Academy of Social Sciences); Song, Lina (University of Nottingham)
    Abstract: Does the availability of internal finance constrain firm growth? Or does it foster it? To answer these questions, we use a panel of 407,096 Chinese firms over the period 2000−2005. We estimate dynamic assets growth equations augmented with cash flow, and find that the growth of state owned enterprises is not affected by cash flow, while that of privately owned firms is most affected. Considering that they represent 62% of the observations in our sample and that, in spite of being typically discriminated against by financial institutions, private firms have experienced sensational growth rates, our results suggest that internal finance has fostered rather than constrained their growth.
    Keywords: assets growth, cash flow, financial constraints
    JEL: D92
    Date: 2008–10
  4. By: Yi-Chi Chen (Department of Economics, National Cheng Kung University, Tainan, Taiwan); Eric Zivot (University of Washington)
    Abstract: Using Bayesian methods, we re-examine the empirical evidence from Ben-David, Lumsdaine and Pappell (“Unit Roots, Postwar Slowdowns and Long-Run Growth: Evidence from Two Structural Breaks”, Empirical Economics, 28, 2003) regarding structural breaks in the long-run growth path of real output series for a number of OECD countries. Our Bayesian framework allows the number and pattern of structural changes in trend and variance to be endogenously determined. We find little evidence of postwar growth slowdowns across countries, and we find smaller output volatility for most of the developed countries after the end of World War II. Our empirical findings are consistent with neoclassical growth models, which predict increasing growth over the long run. The majority of the countries we analyze have grown faster in the postwar era as opposed to the period before the first break.
    Date: 2008–10

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