nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒03‒28
ten papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Intergenerational Complementarities in Education and the Relationship between Growth and Volatility By Theodore Palivos; Dimitrios Varvarigos
  2. The role of fiscal transfers for regional economic convergence in Europe. By Cristina Checherita; Christiane Nickel; Philipp Rother
  3. New Keynesian versus old Keynesian government spending multipliers By Cogan, John F.; Cwik, Tobias; Taylor, John B; Wieland, Volker
  4. The Volatility Curse: Revisiting the Paradox of Plenty By Frederick van der Ploeg; Steven Poelhekke
  5. Impact of Financial Liberalisation on Stock Market Liquidity: Experience of China By Jess Lee; Alfred Wong
  6. Determinants and dimensions of firm growth By Gerrit de Wit; Haibo Zhou
  7. Regional Financial Spillovers Across Europe:A Global VAR Analysis By Silvia Sgherri; Alessandro Galesi
  8. Growth in an oil abundant economy: The case of Venezuela By Bety Agnany; Amaia Iza
  9. The Effect on the Swedish Real Economy of the Financial Crisis By Österholm, Pär
  10. Growth Regressions, Principal Components and Frequentist Model Averaging By Wagner, Martin; Hlouskova, Jaroslava

  1. By: Theodore Palivos; Dimitrios Varvarigos
    Abstract: We construct an overlapping generations model in which parents vote on the tax rate that determines publicly provided education and offspring choose their effort in learning activities. The technology governing the accumulation of human capital allows these decisions to be strategic complements. In the presence of coordination failure, indeterminacy and, possibly, growth cycles emerge. In the absence of coordination failure, the economy moves along a uniquely determined balanced growth path. We argue that such structural differences can account for the negative correlation between volatility and growth.
    Keywords: Human Capital; Economic Growth; Volatility
    JEL: O41
    Date: 2009–03
  2. By: Cristina Checherita (George Mason University, School of Public Policy, 3401 Fairfax Drive, MS 3B1, Arlington, VA 22201, USA.); Christiane Nickel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Philipp Rother (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides evidence on the role of net fiscal transfers to households and EU structural funds for per-capita output convergence across a large sample of European regions during the period 1995-2005. We find that net fiscal transfers, while achieving regional redistribution, seem to impede output growth and promote an "immiserising convergence" - output growth rates in poor receiving regions decline by less than in rich paying regions. EU structural and cohesion funds spent during 1994-1999 had a positive, but slight, impact on future economic growth, mainly through the human development component. JEL Classification: E62, R11, R23.
    Keywords: Fiscal policy, convergence, regional economic growth, regional migration.
    Date: 2009–03
  3. By: Cogan, John F.; Cwik, Tobias; Taylor, John B; Wieland, Volker
    Abstract: Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modeling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small just when needed most, and GDP and employment effects are only one-sixth as large, with private sector employment impacts likely to be even smaller.
    Keywords: Fiscal Policy; Government Spending; Keynesian models; model uncertainty; Multiplier
    JEL: C52 E62
    Date: 2009–03
  4. By: Frederick van der Ploeg; Steven Poelhekke
    Abstract: The volatility of unanticipated output growth in income per capita is detrimental to long-run development, controlling for initial income per capita, population growth, human capital, investment, openness and natural resource dependence. This effect is significant and robust over a wide range of specifications. We unravel the effects of volatility by opening the black box and conditioning the variance of growth shocks on several country characteristics. Natural resource dependence, physical and institutional barriers to trade and associated policy shocks increase volatility sharply and harm growth through this indirect channel. The robust indirect effect of natural resources through volatility trumps any direct effects on economic development, even if natural resource dependence is measured net of extraction costs. Financial development appears to mitigate the harmful causes of volatility. Our panel data estimation confirms our cross-country results, but we also offer evidence that well developed financial systems amplify the effect of short-term terms-of-trade volatility on macroeconomic volatility. 
    Keywords: volatility; growth; natural resource curse; financial development.
    Date: 2009–03
  5. By: Jess Lee (Research Department, Hong Kong Monetary Authority); Alfred Wong (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper assesses the impact of the recent financial reforms in China. Following the country¡¯s accession to the World Trade Organization, financial liberalisation has picked up considerable momentum. Measures introduced encompass deregulation in the banking sector and refinements in various financial markets, as well as allowing more freedom for Chinese and foreign investors to participate and interact domestically and overseas. Compared to other studies on financial liberalisation, this study focuses on a relatively narrower aspect of financial reforms namely, the impact on stock market liquidity. Using a panel data set drawn from the Shanghai stock market, we find a positive and significant liquidity impact associated with the recent round of measures, which reflects not only an improvement in capital allocation efficiency in China¡¯s equity market but, from a financial stability point of view, also a reduction in its vulnerability. The finding also provides evidence on one of the important channels in which financial liberalisation can be transformed into economic growth over time.
    Keywords: Financial liberalisation, liquidity, dual-listed stocks, stock exchanges, fixed-effect panel regression
    JEL: G18 G32 F36 L22 C33
    Date: 2009–01
  6. By: Gerrit de Wit; Haibo Zhou
    Abstract: Firm growth is an important indicator of a thriving economy. Although the determinants of firm growth have been studied in various disciplines, an integrated analysis is still lacking. This paper attempts to provide such an analysis. Many determinants of firm growth are summarized and classified into three dimensions: individual, organizational, and environmental determinants. By conducting an empirical study using 523 Dutch small and medium sized firms, we identify the determinants of firm growth which is measured by employment growth. Our findings show that environmental determinants do not affect firm growth. Individual ones do: entrepreneurs with growth motivation and having technical knowledge are more likely to grow their firms while entrepreneurs characterized by a strong need of achievement are less likely to engage in firm growth. Organizational determinants have the most influence on firm growth: the older thefirm, the less likely it is to grow. Availability of financial capital is found to be crucial to firm growth. Finally, the firm’s scalability (its preparedness to grow) is found to have a positive impact on firm growth.
    Date: 2009–03–17
  7. By: Silvia Sgherri; Alessandro Galesi
    Abstract: The recent financial crisis raises important issues about the transmission of financial shocks across borders. In this paper, a global vector autoregressive (GVAR) model is constructed to assess the relevance of international spillovers following a historical slowdown in U.S. equity prices. The GVAR model contains 27 country-specific models, including the United States, 17 European advanced economies, and 9 European emerging economies. Each country model is linked to the others by a set of country-specific foreign variables, computed using bilateral bank lending exposures. Results reveal considerable comovements of equity prices across mature financial markets. However, the effects on credit growth are found to be country-specific. Evidence indicates that asset prices are the main channel through which-in the short run-financial shocks are transmitted internationally, while the contribution of other variables-like the cost and quantity of credit-becomes more important over longer horizons.
    Keywords: Spillovers , Europe , Emerging markets , Financial systems , Economic integration , Regional shocks , Capital markets , Cross country analysis , Economic models ,
    Date: 2009–02–06
  8. By: Bety Agnany (Department of Economic Theory and Economic History, University of Granada.); Amaia Iza (DFAEII - The University of the Basque Country)
    Abstract: Venezuela´s growth experience over the past fifty years is characterised by a high economic growth rate from 1950 to 1977 and a low economic growth rate over the 1977-2003 period. In particular, we show that the country has been in a ‘great depression’ since the late seventies. We also show that although Venezuela has an oil abundant economy, this growth experience is largely due to the evolution of its real non-oil GDP. We perform a growth accounting exercise to quantify the extent to which the growth experience in the non-oil sector is a result of physical capital accumulation, finding that non-oil sector behavior can largely be explained by the evolution of TFP. Finally, we also make some correlations to determine whether the oil sector has affected the non-oil sector, either through its capital accumulation or through its TFP. We find that the correlation between oil revenues and capital per worker or non-oil TFP is always negative.
    Keywords: non-renewable resources, growth accounting, TFP, oil rents.
    JEL: O47 Q32
    Date: 2008–12–31
  9. By: Österholm, Pär (National Institute of Economic Research)
    Abstract: This paper investigates the effects of the financial crisis on the Swedish real economy. In order to do this, an index which describes the financial conditions of the Swedish economy is developed. The index indicates that domestic Swedish financial conditions have deteriorated substan-tially during 2008 and are now at the highest level since the crisis of the early 1990’s. A Bayesian VAR model with both US and Swedish variables is used to assess the quantitative effects of the financial crisis on Swedish real GDP growth. Results suggest that the Swedish economy will grow substantially slower in the next couple of years due to the financial crisis.
    Keywords: GDP growth; Bayesian VAR
    JEL: E37 E44
    Date: 2009–02–28
  10. By: Wagner, Martin (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Hlouskova, Jaroslava (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: This paper offers two innovations for empirical growth research. First, the paper discusses principal components augmented regressions to take into account all available information in well-behaved regressions. Second, the paper proposes a frequentist model averaging framework as an alternative to Bayesian model averaging approaches. The proposed methodology is applied to three data sets, including the Sala-i-Martin et al. (2004) and Fernandez et al. (2001) data as well as a data set of the European Union member states' regions. Key economic variables are found to be significantly related to economic growth. The findings highlight the relevance of the proposed methodology for empirical economic growth research.
    Keywords: Frequentist model averaging, Growth regressions, Principal components
    JEL: C31 C52 O11 O18 O47
    Date: 2009–03

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