nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒02‒14
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. On economic growth and minimum wages By Luciano Fanti; Luca Gori
  2. Does Inflation Targeting Matter for Output Growth? Evidence from Industrial and Emerging Economies By Varella Mollick, Andre; Torres, Rene Cabral; Carneiro, Francisco G.
  3. Which is the Right Dose of EU Cohesion Policy for Economic Growth? By Hagen, Tobias; Mohl, Philipp
  4. Economies of scale in banking, confidence shocks, and business cycles By Dressler, Scott J.
  5. The effects of inequality on growth: a survey of the theoretical and empirical literature By Christophe Ehrhart
  6. Human Capital, Economic Growth, and Regional Inequality in China By Belton Fleisher; Haizheng Li; Min-Qiang Zhao
  7. Federal Regulation and Aggregate Economic Growth By John W. Dawson; John J. Seater
  8. Growth and Inequality Tradeoffs in a Small Open Economy By Yu-chin Chen; Stephen J. Turnovsky
  9. Modeling the Volatility of Real GDP Growth: The Case of Japan Revisited By WenShwo Fang; Stephen M. Miller
  10. Determinants of Economic Growth: A Bayesian Panel Data Approach By Moral-Benito, Enrique
  11. Growth in Post-Soviet Russia: A Tale of Two Transitions By David N. DeJong; Daniel Berkowitz
  12. Mass Production, Economic Growth and Social Justice: Historical Lessons for Russia By Viktorov, Ilja

  1. By: Luciano Fanti; Luca Gori
    Abstract: We offer an analysis of the existence of a positive relationship between minimum wages and economic growth in a fairly standard general equilibrium, one-sector, two-period overlapping generations model, where the usual Romer-typed knowledge spill-over mechanism in production represents the engine of endogenous growth. It is shown that – contrary to the conventional view which has failed to pay due attention to dynamic contexts with labour market rigidities – the minimum-wage economy may grow faster than the competitive-wage economy in spite of a reduced employment rate and, in particular, a growth-maximising minimum wage does exist. A straightforward message is therefore that policymakers may appropriately use minimum wage policies to promote economic growth and individuals’ welfare.
    Keywords: Endogenous growth; Minimum wage; Unemployment; OLG model
    JEL: H24 J60 O41
    Date: 2009–01–01
  2. By: Varella Mollick, Andre (University of Texas - Pan American); Torres, Rene Cabral (Escuela de Graduados en Administracion Publica y Politica Publica); Carneiro, Francisco G. (The World Bank)
    Abstract: This paper examines the effects of inflation targeting on industrial and emerging economies' output growth over the "globalization years" of 1986-2004. Controlling for trade openness and two indicators of financial globalization, the authors find systematic positive and significant effects of inflation targeting on real output growth. In dynamic models, the findings show strong output persistence in industrial economies, in which partial and full inflation targeting regimes have a positive long-run impact on growth. In emerging markets, only full inflation targeting policies have any output effect in the long-run. The results suggest that strict inflation targeting is needed to make the discipline effect of the disinflation process outweigh the output costs of promoting high interest rates to attract capital flows in a global world. These findings are robust to the treatment of endogenous globalization measures.
    Keywords: Economic Growth; Globalization; Inflation Targeting; Panel Data Methods
    JEL: F31 F32 F33 F34
    Date: 2008–12–01
  3. By: Hagen, Tobias; Mohl, Philipp
    Abstract: The current empirical literature on the impact of EU Cohesion Policy on the economic growth rates of the European regions mainly relies on functional form assumptions. However, it is ex ante not clear which functional form is appropriate with regard to the relationship between structural funds pay- ments and regional economic growth. In order to avoid such assumptions, this paper applies the method of generalized propensity score (GPS) to a sample of 122 NUTS-1 and NUTS-2 EU-15 regions for the time period 1995{2005, which leads to the estimation of a dose-response function, as proposed by Hirano and Imbens (2004). Our results indicate that structural funds payments have a positive, but not statistically significant, impact on the regions' average three-year growth rates. This implies that it does not matter which \dose" of structural funds payments a region receives.
    Keywords: EU structural funds, economic growth, continuous treatment, dose-response function
    JEL: C21 I38 R11
    Date: 2008
  4. By: Dressler, Scott J.
    Abstract: This paper quantitatively investigates equilibrium indeterminacy due to economies of scale (ES) in financial intermediation. Financial intermediation provides deposits (inside money) which can substitute with currency to purchase consumption, and depositing decisions are susceptible to non-fundamental confidence (sunspot) shocks. With the intermediation sector calibrated to match US data: (i) indeterminacy arises for small degrees of ES; (ii) sunspot shocks qualitatively resemble monetary shocks; and (iii) monetary policies can stabilize the real impact of sunspot shocks, but only under complete information. The analysis also assesses the removal of these shocks on the volatility decline observed during the US Great Moderation.
    Keywords: Financial Intermediation; Inside Money; Indeterminacy; Business Cycles
    JEL: E32 C68 E44
    Date: 2009–01
  5. By: Christophe Ehrhart (CRESS-Lessor, Université Rennes 2 - Haute Bretagne)
    Abstract: Basically, the extensive theoretical and empirical literature on the interactions between growth/development and distribution can be divided into two main approaches. The first one examines the impact of economic development on income distribution in a long run perspective. The second one focuses on the inverse causality between inequality and growth. This paper aims at reviewing this second view about the effects of initial inequality of income and wealth on future growth rate. The theoretical literature suggests several channels through which inequality might be harmful for growth, namely three economic explanations (the channel of the capital market imperfections, the approach of endogenous fertility, the argument relating to the domestic market size) and two politico-economic arguments (the approach of endogenous fiscal policy and the political instability channel). The following conclusions can be drawn from our survey of the empirical studies regarding the relationship between inequality and growth: first, only the endogenous fertility approach and the explanation based on political instability receive convincing support from the data. Second, initial inequality of assets has a negative and significant effect on subsequent growth. As a result, wealth redistribution is likely to enhance future growth.
    Keywords: Inequality; Growth
    JEL: O15 O40
    Date: 2009
  6. By: Belton Fleisher (Department of Economics, Ohio State University); Haizheng Li (School of Economics, Georgia Institute of Technology); Min-Qiang Zhao (Department of Economics, Ohio State University)
    Abstract: We show how regional growth patterns in China depend on physical,, human, and infrastructure capital; foreign direct investment (FDI); and market reforms, especially the reforms that followed Deng Xiaoping’s South Trip in 1992 those that resulted from serious hardening of budget constraints of state enterprises around 1997. We find that FDI had a much larger effect on TFP growth before 1994 than after, and we attribute this to the encouragement of and increasing success of private and quasi-private enterprises. We find that human capital positively affects output per worker and productivity growth in our cross-provincial study. Moreover, we find both direct and indirect effects of human capital on TFP growth. The direct effect is hypothesized to come from domestic innovation activities, while the indirect impact is a spillover effect of human capital on TFP growth. We conduct cost-benefit analysis of hypothetical investments in human capital and infrastructure. We find that, while investment in infrastructure generates higher returns in the developed, eastern regions than in the interior, investing in human capital generates slightly higher or comparable returns in the interior regions. We conclude that human capital investment in less-developed areas can improve economic efficiency, neither investment strategy is a magic bullet for reducing China’s regional income disparities.
    JEL: O15 O18 O47 O53
    Date: 2008–08
  7. By: John W. Dawson; John J. Seater
    Abstract: We introduce a new measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it–total factor productivity (TFP), physical capital, and labor. Regulation has caused substantial reductions in the growth rates of both output and TFP and has had effects on the trends in capital and labor that vary over time in both sign and magnitude. Regulation also affects deviations about the trends in output and its factors of production, and the effects differ across dependent variables. Regulation changes the way output is produced by changing the mix of inputs. Changes in regulation and marginal tax rates offer a straightforward explanation for the productivity slowdown of the 1970s. Key Words: Regulation; macroeconomic performance; economic growth; productivity slowdown
    JEL: E20 L50 O40
    Date: 2009
  8. By: Yu-chin Chen (University of Washington); Stephen J. Turnovsky (University of Washington)
    Abstract: This paper analyzes the growth and inequality tradeoff for a small open economy where agents differ in their initial endowments of capital stock and international bond-holdings. Our analysis focuses on the distributional impacts of different structural shocks through their effects on agents’ relative wealth and their labor supply decisions. Supplementing the theoretical analysis with numerical simulations, we demonstrate that openness – access to an international capital market – has important consequences on the growth-inequality tradeoff. Specifically, the growth and distributional consequences of structural shocks depend crucially on whether the underlying heterogeneity originates with the initial endowment of domestic capital or foreign bonds.
    Date: 2008–09
  9. By: WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    Abstract: Previous studies (e.g., Hamori, 2000; Ho and Tsui, 2003; Fountas et al., 2004) find high volatility persistence of economic growth rates using generalized autoregressive conditional heteroskedasticity (GARCH) specifications. This paper reexamines the Japanese case, using the same approach and showing that this finding of high volatility persistence reflects the Great Moderation, which features a sharp decline in the variance as well as two falls in the mean of the growth rates identified by Bai and Perron’s (1998, 2003) multiple structural change test. Our empirical results provide new evidence. First, excess kurtosis drops substantially or disappears in the GARCH or exponential GARCH model that corrects for an additive outlier. Second, using the outlier-corrected data, the integrated GARCH effect or high volatility persistence remains in the specification once we introduce intercept-shift dummies into the mean equation. Third, the time-varying variance falls sharply, only when we incorporate the break in the variance equation. Fourth, the ARCH in mean model finds no effects of our more correct measure of output volatility on output growth or of output growth on its volatility.
    Keywords: Japan, real GDP growth, the Great Moderation, outlier, structural changes, IGARCH effect
    JEL: C32 E32 O40
    Date: 2009–01
  10. By: Moral-Benito, Enrique (CEMFI)
    Abstract: Model uncertainty hampers consensus on the key determinants of economic growth. Some recent cross-country, cross-sectional analyses have employed Bayesian Model Averaging to address the issue of model uncertainty. This paper extends that approach to panel data models with country-specific fixed effects. The empirical results show that the most robust growth determinants are the price of investment goods, distance to major world cities, and political rights. This suggests that growth-promoting policy strategies should aim to reduce taxes and distortions that raise the prices of investment goods; improve access to international markets; and promote democracy-enhancing institutional reforms. Moreover, the empirical results are robust to different prior assumptions on expected model size.
    Keywords: accounting; Average growth; Average growth rate; benchmark; calculations; capital accumulation; civil liberties; conditional convergence; Contribution; convergence parameter; country regressions
    Date: 2009–01–01
  11. By: David N. DeJong; Daniel Berkowitz
    Abstract: . . .
    Date: 2008–09
  12. By: Viktorov, Ilja (Dept. of Economic History, Stockholm University)
    Abstract: This paper examines the impact of mass production on economic development in the United States and Sweden between the 1930s and early 1970s. It suggests that the historical experience in both countries can be used to illustrate a possible pathway for promoting progressive development of the Russian economy. The article discusses the conditions under which mass production can promote economic growth combined with social justice in post-Soviet Russia
    Keywords: economic history; mass production; wage formation; Fordism; Sweden; United States; Russia’s economic crisis
    JEL: N12 N14 N32 N34 O10 O50 O57
    Date: 2009–02–06

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