nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒02‒07
seven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Distress in the financial sector and economic activity By Mark A. Carlson; Thomas B. King; Kurt F. Lewis
  2. Financing obstacles and growth: An analysis for euro area non-financial corporations By Chiara Coluzzi; Annalisa Ferrando; Carmen Martínez-Carrascal
  3. Agglomeration and Growth with Endogenous Expenditure Shares By Fabio Cerina; Francesco Mureddu
  4. Remittances and economic growth in Latin America and the Caribbean: The Impact of the human capital development By Garcia-Fuentes, Pablo A.; Kennedy, P. Lynn
  5. The Superlative Recession and economic policies By Tatom, John
  6. Federal, State, and Local Governments: Evaluating their Separate Roles in US Growth By Higgins, Matthew; Young, Andrew; Levy, Daniel
  7. “Sustainable†Economic Growth: The Ominous Potency of Structural Change By Lopez, Ramon E.

  1. By: Mark A. Carlson; Thomas B. King; Kurt F. Lewis
    Abstract: This paper explores the relationship between the health of the financial sector and the rest of the economy. We develop an indicator of financial sector health using a distance-to-default measure based on a Merton-style option pricing model. Our measure spans over three decades and appears to capture periods when financial sector institutions were strong and when they were weak. We then use vector autoregressions to assess whether our indicator of financial-sector health affects the real economy, in particular non-residential investment. The results indicate that our measure has a considerable impact. Moreover, we find that this financial channel amplifies changes in investment resulting from shocks to non-financial firm profitability.
    Date: 2009
  2. By: Chiara Coluzzi (University of Rome Tor Vergata); Annalisa Ferrando (European Central Bank); Carmen Martínez-Carrascal (Banco de España)
    Abstract: This paper investigates whether financial obstacles, and, more generally, financial pressure faced by firms, significantly affect firm growth. For this purpose, we use an unbalanced panel of about 1,000,000 observations for around 155,000 non-financial corporations in five euro area countries. In addition to the balance sheet information in this panel, we also rely on firm level survey data. In this way we are able to work out a direct measure of the firms’ probability of facing financing obstacles. Our results indicate that, though based on few variables, this measure appears to be relevant in explaining firm growth in four out of the five countries considered. Other firm-level variables related to the financial pressure faced by firms, such as cash flow (debt burden) are found to exert a positive (negative) impact on firm growth, while the results for leverage are less clear-cut.
    Keywords: Financing Constraints, Firm Growth, Panel Data
    JEL: C23 E22 G32 L11 L25
    Date: 2009–01
  3. By: Fabio Cerina; Francesco Mureddu
    Abstract: We develop a New Economic Geography and Growth model which, by using a CES utility function in the second-stage optimization problem, allows for expenditure shares in industrial goods to be endogenously determined. The implications of our generalization are quite relevant. In particular, we obtain the following novel results: 1) catastrophic agglomeration may always take place, whatever the degree of market integration, provided that the traditional and the industrial goods are sufficiently good substitutes; 2) the regional rate of growth is affected by the interregional allocation of economic activities even in the absence of localized spillovers, so that geography always matters for growth and 3) the regional rate of growth is affected by the degree of market openness: in particular, depending on whether the traditional and the industrial goods are good or poor substitutes, economic integration may be respectively growth-enhancing or growth-detrimental.
    Keywords: new economic geography, endogenous expenditure shares, substitution effect
    JEL: O41 F43 R12
    Date: 2008
  4. By: Garcia-Fuentes, Pablo A.; Kennedy, P. Lynn
    Abstract: Remittances are one source of external financing for developing countries that have been increasing in both size and importance as of late. However, the issue about the impact on economic growth from remittances is still opened for discussion. This paper adds to this discussion by investigating the impact of remittances on growth through human capital using a panel data analysis for a sample of 14 Latin American and Caribbean (LAC) countries during the period 1975-2000. The results indicate that remittances have a positive impact on economic growth in the representative countries from the LAC region; however, the realization of this impact holds only when the remittance receiving country has a minimum threshold of human capital stock.
    Keywords: Remittances, Human Capital, Growth, Latin America and the Caribbean, International Development, International Relations/Trade, Labor and Human Capital,
    Date: 2009
  5. By: Tatom, John
    Abstract: In late 2008 and early 2009, there has been a serious deterioration in the economic outlook of political leaders, the media and many economic analysts. Comparisons of recent performance and the outlook have degenerated into comparisons with the Great Depression of the 1930s, suggesting that the current recession is the worst since the 1930s. This recession should be called the superlative recession because discussions invariably refer to the most dismal performance since the Great Depression. These superlative comparisons are far off base. But more importantly, the superlatives seem to have succeeded in reversing 70 years of history on economic policy and economic thought. With the benefit of time, depression era policies had been seen as complete failures that extended and worsened the depression. A long delayed monetary policy easing has offered new possibilities for an end to the deepening recession, but its continuation remains in doubt because it is the result of a shift in policy procedures more than of a shift in policy. More troublesome is that massive fiscal policy programs have become central to the policy debate, despite three large failed fiscal responses over the past year and a strong consensus in the policy community that such efforts are not likely to be effective. A change of leadership has focused efforts on increasing federal spending in ways and to an extent not seen in many years, comparable with the fall 2008 explosion in money growth and putting fiscal policy in the same superlative response category as the recession itself.
    Keywords: recession; monetary policy; fiscal policy
    JEL: E32 E52 E63 A10
    Date: 2009–01–30
  6. By: Higgins, Matthew; Young, Andrew; Levy, Daniel
    Abstract: We use US county level data (3,058 observations) from 1970 to 1998 to explore the relationship between economic growth and the extent of government employment at three levels: federal, state and local. We find that increases in federal, state and local government employments are all negatively associated with economic growth. We find no evidence that government is more efficient at lower levels. While we cannot separate out the productive and redistributive services of government, we document that the county-level income distribution became slightly more unequal from 1970 to 1998. For those who justify government activities in terms of equity concerns – perhaps even trading off economic growth for equity – the burden falls on them to show that the income distribution would have widened more in the absence of government activities. We conclude that a release of government-employed labor inputs to the private sector would be growth-enhancing.
    Keywords: Economic Growth; Federal Government; State Government; Local Government; County-Level Data; Metro and Non-Metro Counties; Income Distribution; Equity
    JEL: E62 O18 H50 O40 H70 O11 O43 O51 R11
    Date: 2009–01–29
  7. By: Lopez, Ramon E.
    Abstract: This paper explores the conditions for sustainable development through two models of economic growth that elucidates two extremes; an open economy with constant prices, and a closed economy with endogenous prices. Sustainable development is easier to achieve in the case of the former than the latter. A closed economy requires a high degree of flexibility of its consumers, with an elasticity of substitution of clean goods substantially above 1 in order to achieve sustainable development. Three mechanisms have to work in tandem: the technique, composition, and growth-limit effects. In contrast, the open economy requires no flexibility on the part of its consumers and may achieve sustainable development through only one mechanism – the composition effect. For the open economy case, the composition effect can completely suppress the technique effect, resulting in both mechanisms acting like substitutes. On the other hand, for the closed economy case, both effects are highly complementary. The historical experience of the North indicates more similarities with the open economy paradigm.
    Keywords: Environmental Economics and Policy, International Development, International Relations/Trade, Labor and Human Capital,
    Date: 2008

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