nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒05‒02
eleven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Threshold Effect and Financial Intermediation in Economic Development By SOEDARMONO, Wahyoe; AUGIER, Laurent
  2. The Second Transition: Eastern Europe in Perspective By Ashoka Mody; Daniel Leigh; Stefania Fabrizio
  3. Bringing Growth Theory "Down to Earth" By Lopez, Ramon; Stocking, Andrew
  4. Five Years After: European Union Membership and Macro-Financial Stability in the New Member States By Martin Cihák; Wim Fonteyne
  5. Global Liquidity, Risk Premiums and Growth Opportunities By Gianni De Nicoló; Iryna V. Ivaschenko
  6. From Subprime Loans to Subprime Growth? Evidence for the Euro Area By Martin Cihák; Petya Koeva Brooks
  7. Outward Foreign Direct Investment and Economic Growth: Evidence from Japan and Singapore By Chew-Ging Lee
  8. Industrial structure, appropriate technology and economic growth in less developed countries By Lin, Justin Yifu; Zhang, Pengfei
  9. A Schumpeterian Growth Model with Heterogenous Firms By A. Minniti; C.P. Parello; P.S. Segerstrom
  10. Fiscal and Monetary Policy During Downturns: Evidence from the G7 By Daniel Leigh; Sven Jari Stehn
  11. Report on trends in the Italian productive system By Andrea Brandolini; Matteo Bugamelli; Guglielmo Barone; Antonio Bassanetti; Magda Bianco; Emanuele Breda; Emanuela Ciapanna; Federico Cingano; Francesco D’Amuri; Leandro D’Aurizio; Virginia Di Nino; Stefano Federico; Andrea Generale; Federica Lagna; Francesca Lotti; Giuliana Palumbo; Enrico Sette; Bruna Szego; Alessandra Staderini; Roberto Torrini; Roberta Zizza; Francesco Zollino; Stefania Zotteri

  1. By: SOEDARMONO, Wahyoe; AUGIER, Laurent
    Abstract: This paper analyzes the importance of financial intermediation on economic growth. Using the Neoclassical growth framework, we raise a new issue where our model has multiple stationary states with threshold effect. We further confirm that financial intermediation is better than self-financing system in order to ensure the existence and uniqueness of long-run steady state equilibrium of capital stock, as well as to decrease threshold level. The presence of threshold effect is an important finding in studying the finance-growth nexus, since it prevents the economy to raise sufficient initial capital.
    Keywords: Threshold Effect; Financial Intermediation; Economic Growth; Developing Countries
    JEL: O16 C61 C62
    Date: 2009–04–28
  2. By: Ashoka Mody; Daniel Leigh; Stefania Fabrizio
    Abstract: The countries of Eastern Europe achieved two remarkable transitions in the short period of the last two decades: from plan to market and, then, in the run-up to and entry into the European Union, they rode a wave of global trade and financial market integration. Focusing on the second transition, this paper reaches three conclusions. First, by several metrics, East European and East Asian growth performances were about on par from the mid-1990s; both regions far surpassed Latin American growth. Second, the mechanisms of growth in East Europe and East Asia were, however, very different. East Europe relied on a distinctive-often discredited-model, embracing financial integration with structural change to compensate for appreciating real exchange rates. In contrast, East Asia contained further financial integration and maintained steady or depreciating real exchange rates. Third, the ongoing financial turbulence has, thus far, not had an obviously differential impact on emerging market regions: rather, the hot spots in each region reflect individual country vulnerabilities. If the East European growth model is distinctive, is it sustainable and replicable? The paper speculates on the possibilities.
    Keywords: Transition economies , Eastern Europe , Emerging markets , Economic growth , International trade , Economic integration , European Union , Cross country analysis ,
    Date: 2009–03–17
  3. By: Lopez, Ramon; Stocking, Andrew
    Abstract: Explicitly accounting for certain basic physical laws governing the âearthâ sector dramatically enriches our ability to explain a high degree of diversity in observed patterns of economic growth. We provide a theoretical explanation of why some countries have been able to sustain a more or less constant and positive rate of economic growth for many decades while so many others have failed to do so. The analysis predicts that countries that have an over abundance of physical capital (a concept that is precisely defined in the text) may be unable to sustain a positive rate of economic growth over the long run. Too much physical capital may affect the dynamics of the economy ultimately leading to stagnation. The plausibility of the growth model introduced here is demonstrated by its ability to predict some important stylized facts for which standard endogenous growth models generally cannot account.
    Keywords: endogenous growth theory, unbalanced growth, structural change, stagnation, Environmental Economics and Policy, International Development, Labor and Human Capital, Political Economy, E22, Q01, O41,
    Date: 2009
  4. By: Martin Cihák; Wim Fonteyne
    Abstract: The proximity of the European Union, the prospect of membership, and actual entry by the New Member States (NMS) increased economic and financial integration in the region, leading to fast economic growth based on sizeable capital inflows. EU membership helped in developing sound macroeconomic and financial stability frameworks in the NMS. However, these frameworks remain work in progress and as such could not safeguard against private sector exuberance or risky policies, especially in the face of an unprecedented global financial crisis. Hence, more prudent policies and further strengthening of policy frameworks, especially with respect to financial stability, seem warranted.
    Keywords: Financial stability , European Union , Eastern Europe , Economic integration , Economic growth , Exchange rates , Price stabilization , Payments imbalances , Financial crisis , Crisis prevention , Cross country analysis ,
    Date: 2009–03–27
  5. By: Gianni De Nicoló; Iryna V. Ivaschenko
    Abstract: This paper constructs new indicators of liquidity for equity, bond and money markets in major advanced and emerging market countries, documents their evolution and comovements, and assesses the extent to which such measures are determinants of selected spreads and proxy measures of countries' growth opportunities. Three main results obtain. First, there is evidence of an historical increase in market liquidity since the early 1990s, in part as a result of advances in international financial integration, but markets have been increasingly exposed to global systemic liquidity shocks. Second, liquidity indicators appear to be important determinants of bond spreads in advanced economies and EMBI spreads in emerging markets. Third, improvements in market liquidity have significant real effects, as liquidity indicators have a significant positive impact on proxy measures of countries' growth opportunities.
    Keywords: International liquidity , Stock markets , Bond markets , Risk premium , Developed countries , Emerging markets , Economic integration , Economic growth , Economic models ,
    Date: 2009–03–19
  6. By: Martin Cihák; Petya Koeva Brooks
    Abstract: The global financial crisis has highlighted the potential of financial conditions for influencing real economic activity. We examine the linkages between the financial and real sectors in the euro area, finding that (i) bank loan supply responds negatively to declines in bank soundness; (ii) a cutback in bank loan supply has a negative impact on economic activity; (iii) a positive shock to the corporate bond spread lowers industrial output; and (iv) risk indicators for the banking, corporate, and public sectors show an improvement beginning in 2002–03, followed by a major deterioration since 2007. These estimates imply that the currently estimated bank losses would subtract some 2 percentage points from the euro area output (but with considerable uncertainty around the estimates).
    Keywords: Credit risk , Euro Area , Financial sector , Real sector , Banking , Demand for money , Interest rates , Financial risk , Economic models ,
    Date: 2009–03–27
  7. By: Chew-Ging Lee (Nottingham University Business School - Malaysia Campus)
    Abstract: This article aims at analyzing the role of foreign direct investment (FDI) outflows in economic performance and the impact of economic growth on outward FDI with the data of two high income Asian countries: Japan and Singapore. The results show that there is a short-run bidirectional causality between outward FDI and GDP per capita for Singapore, but a long-run bidirectional causality for Japan. In the short-run, per capita income of Japan Granger causes its outward FDI.
    Keywords: Causality; Outward FDI; Growth
    JEL: F20 O10
    Date: 2009–04
  8. By: Lin, Justin Yifu; Zhang, Pengfei
    Abstract: The authors develop an endogenous growth model that combines structural change with repeated product improvement. That is, the technologies in one sector of the model become not only increasingly capital-intensive, but also progressively productive over time. Application of the basic model to less developed economies shows that the (optimal) industrial structure and the (most) appropriate technologies in less developed economies are endogenously determined by their factor endowments. A firm in a less developed country that enters a capital-intensive, advanced industry in a developed country would be nonviable owing to the relative scarcity of capital in the factor endowments of less developed countries.
    Keywords: Economic Theory&Research,Political Economy,Technology Industry,Economic Growth,Inequality
    Date: 2009–04–01
  9. By: A. Minniti; C.P. Parello; P.S. Segerstrom
    Date: 2008–10
  10. By: Daniel Leigh; Sven Jari Stehn
    Abstract: This paper analyzes how fiscal and monetary policy typically respond during downturns in G7 countries. It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in “Anglo-Saxon†countries, but the response differs substantially across fiscal instruments. Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.
    Keywords: Fiscal policy , Group of seven , Monetary policy , Government expenditures , Revenues , Economic stabilization , Economic models , Cross country analysis ,
    Date: 2009–03–19
  11. By: Andrea Brandolini (Banca d'Italia); Matteo Bugamelli (Banca d'Italia); Guglielmo Barone (Banca d'Italia); Antonio Bassanetti (Banca d'Italia); Magda Bianco (Banca d'Italia); Emanuele Breda (Banca d'Italia); Emanuela Ciapanna (Banca d'Italia); Federico Cingano (Banca d'Italia); Francesco D’Amuri (Banca d'Italia); Leandro D’Aurizio (Banca d'Italia); Virginia Di Nino (Banca d'Italia); Stefano Federico (Banca d'Italia); Andrea Generale (Banca d'Italia); Federica Lagna (Banca d'Italia); Francesca Lotti (Banca d'Italia); Giuliana Palumbo (Banca d'Italia); Enrico Sette (Banca d'Italia); Bruna Szego (Banca d'Italia); Alessandra Staderini (Banca d'Italia); Roberto Torrini (Banca d'Italia); Roberta Zizza (Banca d'Italia); Francesco Zollino (Banca d'Italia); Stefania Zotteri (Banca d'Italia)
    Abstract: In the last decade the Italian economy has underperformed compared both with the previous decades and with the main European countries. It is widely acknowledged that this evolution reflects unresolved structural problems, which have become more urgent in view of the major changes in the world economy (the new technological paradigm, globalization, European economic integration). The goal of the Report is to make a critical survey of all the empirical analyses on the Italian economy and to derive policy suggestions. The evolution of Italy’s productive system is examined from a long-run perspective, highlighting weaknesses and possible signs of recovery and elaborating on the systemic features that may have negatively affected growth performance directly or indirectly through the above exogenous shocks. The focus, mostly but not exclusively microeconomic, emphasizes the considerable heterogeneity of firms, a crucial element for identifying the factors that affect economic growth.
    Keywords: growth, productivity, market structure, firm heterogeneity
    JEL: D20 O52 P42
    Date: 2009–04

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