nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒01‒31
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. The FDI-Growth Nexus in Latin America: The Role of Source Countries and Local Conditions By Prüfer, P.; Tondl, G.
  2. Decomposition of Economic and Productivity Growth in Post-reform China. By Kui-Wai Li; Tung Liu; Lihong Yun
  3. The economic and fiscal consequences of financial crises By Reinhart, Carmen
  4. Explaining Episodes of Growth Accelerations, Decelerations, and Collapses in Western Africa By Gonzalo Salinas; Patrick A. Imam
  5. Relation entre intégration financière et croissance: pourquoi est-elle ambiguë? By Ben Doudou, Makrem
  6. Total Factor Productivity and Economic Growth in Indonesia By Pierre van der Eng
  7. Growth, Foreign Direct Investment and Urban Concentration: Unbundling Spatial Lags By Steven Poelhekke; Frederick van der Ploeg
  8. Are sectoral stock prices useful for predicting euro area GDP? By Andersson, Magnus; D'Agostino, Antonello
  9. Is Monetary Policy Effective During Financial Crises? By Frederic S. Mishkin

  1. By: Prüfer, P.; Tondl, G. (Tilburg University, Center for Economic Research)
    Abstract: Foreign Direct Investment (FDI) has surged in Latin America (LA) since the mid 1990s. European and North American FDI is of capital importance. We investigate the FDI-growth nexus in LA allowing for different source countries, regional hetero- geneity, interaction terms with FDI, and more than 20 growth determinants. We use Bayesian Model Averaging to address model uncertainty and to select the best mod- els and most robust parameters. The principal finding is that a positive FDI-growth nexus in LA requires a functioning legal framework and macroeconomic stability. We also find that European FDI is only indirectly correlated with productivity growth, whereas North American FDI is more robust and thus directly correlated with pro- ductivity growth.
    Keywords: FDI-growth nexus;model uncertainty;Bayesian Model Averaging;Latin America
    JEL: C52 F21 F43 O54
    Date: 2008
  2. By: Kui-Wai Li (City University of Hong Kong, Hong Kong SAR); Tung Liu (Department of Economics, Ball State University); Lihong Yun (City University of Hong Kong, Hong Kong SAR)
    Abstract: This paper examines and applies the theoretical foundation of the decomposition of economic and productivity growth to the thirty provinces in China’s post-reform economy. The four attributes of economic growth are input growth, adjusted economies of scale effect, technical progress, and efficiency growth. A stochastic frontier model is used to estimates the growth attributes, and a human capital variable is incorporated in the translog production function. The empirical results show that input growth is the major contributor to economic growth and human capital is inadequate even though it has a positive and significant effect on growth. Technical progress is the main contributor to productivity growth and the scale economies has become important in recent years, but technical efficiency has edged downwards in the sample period. The relevant policy implication for a sustainable post-reform China economy is the need to promote human capital accumulation and improvement in technical efficiency.
    Keywords: technical progress, technical efficiency, economies of scale, human capital, China economy
    JEL: C2 D24 O4 O53
    Date: 2008–12
  3. By: Reinhart, Carmen
    Abstract: Financial crises are historically associated with the “4 deadly D’s”: Sharp economic downturns follow banking crises; with government revenues dragged down, fiscal deficits worsen; deficits lead to debt; as debt piles up rating downgrades follow. For the most fortunate countries, the crisis does not lead to the deadliest D: default, but for many it has.
    Keywords: financial crises; unemployment; debt; deficit; housing prices
    JEL: F0 E6
    Date: 2009–01–26
  4. By: Gonzalo Salinas; Patrick A. Imam
    Abstract: The growth literature has had problems explaining the "sub-Saharan African growth dummy" in cross-country regressions. Instead of taking the usual approach of focusing on long-run growth and assuming that sub-Saharan countries have homogenous parameters in growth regressions, we concentrate our analysis on episodes of growth turnarounds (identifying growth accelerations, decelerations, and collapses) and use only West African countries in our sample. The driving force of growth turnarounds are estimated by analyzing external shocks, political and institutional changes, economic reforms, and indicators particularly relevant to the region. Using probits for a group of 22 Western African economies for the period 1960-2006, we find that growth accelerations are most clearly associated with external shocks, economic liberalization, political stability, and closeness to the coast; decelerations occurred during short-lived regimes and when corruption indices weakened; and collapses are linked to external shocks, falling domestic credit, and proximity to the coast. We then identify policy implications.
    Keywords: Economic growth , West Africa , Economic reforms , External shocks , Terms of trade , Transfers of foreigners income , Economic models ,
    Date: 2008–12–17
  5. By: Ben Doudou, Makrem
    Abstract: Résumé: La relation entre l’intégration financière et la croissance économique est jusqu’à nos jour ambiguë. D’un coté, les études théoriques affirment que la libéralisation du compte capital peut aider les pays à augmenter leur taux de croissance et à améliorer leur niveau de vie. D’un autre coté, on remarque qu’il y a peu d’études empiriques qui supportent la proposition que l’intégration financière internationale admet un effet significatif sur la croissance. Cette contribution cherche à expliquer la divergence des résultats entre les études théoriques et empiriques réalisées sur la question. Nous démontrons que cette ambiguïté est due à l’utilisation d’un échantillon hétérogène.
    Abstract: The relation between financial integration and the economic growth is until now ambiguous. On one hand, the theoretical studies assert that the liberalization of the capital account can help countries to increase their growth rate and to improve their standard of living. On the other one , we notice that there are few empirical studies which support the proposition that the international financial integration admits a significant effect on growth. This contribution tries to explain the difference of the results between the theoretical and empirical studies realized on the question. We demonstrate that this ambiguity is due to the use of a heterogeneous sample.
    Keywords: intégration financière; croissance économique; données de panel
    JEL: F36
    Date: 2009–01–24
  6. By: Pierre van der Eng
    Abstract: This paper revisits the discussion about the contribution of Total Factor Productivity (TFP) growth to Indonesia’s economic growth during 1970-2007. It re-estimates the contribution of TFP to economic growth during this period on the basis of new estimates of GDP, capital stock, education-adjusted employment, and factor income shares. After accounting for the growth of capital stock and education-adjusted employment, the residual TFP growth was on average -0.2% per year during 1971- 2007. Capital stock growth and education-augmented employment growth explained 70% and 34%, respectively, and TFP growth -4%. Only during 2000-07 was TFP growth 1.7% per year, explaining 33% of GDP growth. The paper doubts that these results imply that the Indonesian economy did not experience the impact of technological change, as much of it may be embodied in the capital stock estimates.
    Keywords: economic growth, Indonesia, productivity
    JEL: N15 O11 O47 O53
    Date: 2009
  7. By: Steven Poelhekke; Frederick van der Ploeg
    Abstract: Cross-country regressions suggest that urbanization and FDI are important drivers of growth However, it is not clear that primacy eventually hurts growth performance. Since it is tough to interpret cross-country growth regressions, we provide detailed evidence on the determinants of outward FDI from the US. FDI is higher in countries that are close to the US and have good institutions, well developed financial systems, a high road density, a high income per capita and substantial natural resource exports. Countries also attract more FDI if they have more mediumsized cities and primacy is not too large. We show that good institutions in neighbouring countries are important drivers of FDI. FDI is higher if neighbours suffer from primacy. However, FDI is attracted if surrounding countries have fewer cities, restrictions on international trade and low market potential (income per capita). We tentatively conclude that cities are important drivers of FDI and growth and unbundling spatial lags matters. Robustness is verified by re-estimating our regressions with fixed effects and for the sample of OECD countries. 
    Keywords: growth; foreign investment; cities; urbanization; primacy; spatial lags; spatialautoregression; surrounding market potential; fragmentation; export-platform
    JEL: C31 F21 F23 F43 O47
    Date: 2009–01
  8. By: Andersson, Magnus (European Central Bank); D'Agostino, Antonello (Central Bank and Financial Services Authority of Ireland)
    Abstract: This paper evaluates how well sectoral stock prices forecast future economic activity compared to traditional predictors such as the term spread, dividend yield, exchange rates and money growth. The study is applied to euro area financial asset prices and real economic growth, covering the period 1973 to 2006. The paper finds that the term spread is the best predictor of future growth in the period leading up to the introduction of Monetary Union. After 1999, however, sectoral stock prices in general provide more accurate forecasts than traditional asset price measures across all forecast horizons.
    Date: 2008–04
  9. By: Frederic S. Mishkin
    Abstract: This short paper argues that the view that monetary policy is ineffective during financial crises is not only wrong, but may promote policy inaction in the face of a severe contractionary shock. To the contrary, monetary policy is more potent during financial crises because aggressive monetary policy easing can make adverse feedback loops less likely. The fact that monetary policy is more potent than during normal times provides a rationale for a risk-management approach to counter the contractionary effects from financial crises, in which monetary policy is far less inertial than would otherwise be typical – not only by moving decisively through conventional or nonconventional means to reduce downside risks from the financial disruption, but also in being prepared to quickly take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks.
    JEL: E52 G1
    Date: 2009–01

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