nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒05‒23
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Oil and Growth in Transition Countries By Christa N. Brunnschweiler
  2. The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving, and Growth By Erasmo Papagni
  3. Financial Stress, Downturns, and Recoveries By Selim Elekdag; Roberto Cardarelli; Subir Lall
  4. Remittances: An Automatic Output Stabilizer? By Ralph Chami; Dalia Hakura; Peter Montiel
  5. Regional Financial Development and Bank Competition: Effects on Firms' Growth By Fernandez de Guevara, Juan; Maudos, Joaquin
  6. When Economic Growth is Less than Exponential By Christian Groth; Karl-Josef Koch; Thomas M. Steger
  7. Does Growth Cause Structural Change, or Is it the Other Way Round? A Dynamic Panel Data Analyses for Seven OECD Countries By Andreas Dietrich
  8. Investment in Relationship-Specific Assets: Does Finance Matter? By Kukenova, Madina; Strieborny, Martin
  9. The Two Waves of Service-Sector Growth By Barry Eichengreen
  10. Do "Clean Hands" Ensure Healthy Growth? Theory and Practice in the Battle Against Corruption By Coppier, Raffaella; Costantini, Mauro; Piga, Gustavo
  11. Does Inequality Harm Income Mobility and Growth? An Assessment of the Growth Impact of Income and Education Inequality in Paraguay 1992-2002 By Thomas Otter
  12. The Tradeoff Between Growth and Redistribution: ELIE in an Overlapping Generations Model By David De La Croix; Michel Lubrano
  13. Remittances, financing constraints growth volatility : Do remittances dampen or magnify shocks ?. By Dramane Coulibaly
  14. Infrastructure endowment and investment as determinants of regional growth in the European Union By Crescenzi, Riccardo; Rodriguez-Pose, Andres

  1. By: Christa N. Brunnschweiler (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: This paper examines the impact of oil on economic growth in transition economies of the former Soviet Union (FSU) and Central and Eastern Europe (CEE). We use oil production and reserves data in a series of panel estimations to show that oil has had strong and robust positive growth effects between 1990-2006. This is confirmed when we consider the different oil ownership structures. Additionally, we find that privatization levels have had positive growth effects, while privatization speed has had negative effects on growth.
    Keywords: oil, resource curse, economic growth, transition countries, oil ownership
    JEL: Q32 O40 O13 P28
    Date: 2009–05
  2. By: Erasmo Papagni (-)
    Abstract: This paper investigates economic growth under liquidity constraints by taking into account the choices of fertility, human capital and saving. In a model of four overlapping generations, parents are altruistic towards their offspring and finance their education investment. The government provides education subsidies to young adult parents and levies taxes on income of the adult generation. Sensitivity analysis on borrowing limits and tax parameters highlights effects with opposite sign on the main endogenous variables at steady state. A lift in liquidity constraints decreases savings and capital accumulation and this effect is responsible for the ambiguous sign of comparative statics on the rate of fertility and on human capital investment. From model simulation, we derive an inverted U-shaped curve relating the borrowing limit with fertility, education and growth, meaning that financial reforms in the less developed countries have positive effects on the economy in the long-run, even if they raise fertility and reduce savings. Greater government subsidies to human capital investments and lower income taxes have positive effects on savings and fertility. The same parameters present ambiguous effects on education investments and growth. Numerical simulations show that a) human capital investment has an inverted U-shaped relation with income taxes and education subsidies; b) economic growth decreases with greater income taxes and increases with higher education subsidies.
    Keywords: -
    JEL: O40 O16 J13 D91
    Date: 2008–09–30
  3. By: Selim Elekdag; Roberto Cardarelli; Subir Lall
    Abstract: This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress-in particular banking distress-on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems.
    Keywords: Financial crisis , Financial systems , Banking sector , Exchange markets , Securities markets , Banking crisis , Economic recession , Economic recovery , Business cycles , Cross country analysis ,
    Date: 2009–05–13
  4. By: Ralph Chami; Dalia Hakura; Peter Montiel
    Abstract: Remittance flows appear to be falling worldwide for the first time in decades as a result of the ongoing financial turmoil. It is suspected that the drop in remittance income into developing and emerging markets will have a destabilizing effect on these economies. The paper estimates the impact of remittances on output stability for countries that are dependent on these income flows. Using a sample of 70 countries, including 16 advanced economies and 54 developing countries, we find robust evidence that remittances have a negative effect on output growth volatility of recipient countries. This result supports the notion that remittance flows are a stabilizing influence on output. Thus, the fall in remittances precipitated by the ongoing global financial crisis could potentially increase output variability in recipient countries. This would present a hard challenge for governments in those countries already suffering from the crisis: they must resort to an already stressed and limited set of policy instruments, such as fiscal policy, to counter the resulting adverse economic and social impacts of lower remittances.
    Keywords: Inward remittances , Developing countries , Developed countries , Capital inflows , Economic growth , Production , External shocks , Financial crisis , Poverty , Financial stability , Economic models , Cross country analysis ,
    Date: 2009–04–23
  5. By: Fernandez de Guevara, Juan; Maudos, Joaquin
    Abstract: This paper analyzes the effect of regional financial development and bank competition on firms’ growth using the Spanish provinces as a testing ground. Our results show that firms in industries with a greater dependence on external finance grow faster in more financially developed provinces. The results also show that bank monopoly power has an inverted-U effect on firms’ growth, suggesting that market power has its highest effect at intermediate values. The effect is heterogeneous among firms according to the financial dependence of the industry they belong to. This result is consistent with the literature on relationship banking which argues that bank competition can have a negative effect on the availability of finance for more informationally opaque firms.
    Keywords: economic growth; regional financial development; bank competition
    JEL: L11 D40 G21
    Date: 2009
  6. By: Christian Groth (Department of Economics, University of Copenhagen); Karl-Josef Koch (University of Siegen); Thomas M. Steger (University of Leipzig and CESifo Munich)
    Abstract: This paper argues that growth theory needs a more general notion of “regularity” than that of exponential growth. We suggest that paths along which the rate of decline of the growth rate is proportional to the growth rate itself deserve attention. This opens up for considering a richer set of parameter combinations than in standard growth models. And it avoids the usual oversimplistic dichotomy of either exponential growth or stagnation. Allowing zero population growth in three different growth models (the Jones R&D-based model, a learning-by-doing model, and an embodied technical change model) serve as illustrations that a continuum of “regular” growth processes fill the whole range between exponential growth and complete stagnation.
    Keywords: quasi-arithmetic growth; regular growth; semi-endogenous growth; knife-edge restrictions; learning by doing; embodied technical change
    JEL: O31 O40 O41
    Date: 2009–05
  7. By: Andreas Dietrich (Darmstadt University of Technology)
    Abstract: In economic development, structural change among the three main sectors of an economy accompanies with aggregate economic growth. Nevertheless the question whether economic growth causes structural change or change in the economic structure causes aggregate growth is still unanswered. To shed some more light on this issue, this study examines a Granger- causality test in a panel environment to determine the causality of economic growth and structural change measured either in terms of employment shares or in terms of real value added shares. Estimation and analysis with annual data of seven OECD countries covering the period from 1960-2004 show that the causality appears to be heterogeneous.
    Keywords: structural change, economic growth, tertiarization, panel Granger-causality-test
    JEL: L16 O14 O57
    Date: 2009–05–11
  8. By: Kukenova, Madina; Strieborny, Martin
    Abstract: We show that contract-intensive industries particularly thrive both in countries with high initial level of financial development and in the US states that deregulated their banking sector. These industries use high share of relationship-specific inputs that can be purchased only via specific contracts with the suppliers. Accordingly, both firms in those industries and their suppliers face above-average levels of risk and transaction costs. Our empirical results thus confirm the theoretical claim that finance promotes real economy via managing risk and decreasing transaction costs. Furthermore, the pro-growth e¤ect of finance seems to come from financial intermediaries like banks rather than from stock markets. This suggests that the intrinsic functions of relationship-banking (long-term commitment, increase in reputation and planning horizon of the borrowers) are especially important for the contract-intensive industries.
    Keywords: financial development; relationship-specific investment; growth
    JEL: O16 O40 G21
    Date: 2009–04
  9. By: Barry Eichengreen
    Abstract: This paper will hopefully provide an important methodological tool for all researchers who may be attempting to analyze and explain the growth of the service sector and its share in the Indian GDP over the past decades. [ICRIER WP no. 235].
    Keywords: India, regressions, middle income, democratic, urbanization, service sector, GDP, Indian, per capita income, banking, insurance, financial services,
    Date: 2009
  10. By: Coppier, Raffaella (Department of Economic and Financial Institutions, University of Macerata, Macerata (MC), Italy); Costantini, Mauro (Department of Economics, University of Vienna, Vienna, Austria); Piga, Gustavo (Department of Economics and Institutions, University of Rome Tor Vergata, Roma, Italy)
    Abstract: This paper analyzes the existing relationship between economic growth and the monitoring of corruption and examines the possible outcome of the implementation of a State reform in order to weed out corruption. Growth is always higher when monitoring is high and therefore corruption eradicated. But growth declines when monitoring against corruption is not too high, say intermediate, so much that it makes an equilibrium with corruption and little monitoring a more growth-enhancing solution. It is also stressed that when reforms to combat corruption appear to be implausible, they tend to curb most productive investments. The model is estimated using a dynamic panel data approach for Italy. Italy has been plagued by corruption and in the late 80s and early 90s several scandals erupted which led to the well-known "Clean Hands" (Mani pulite) inquiries. Empirical results support the theoretical model.
    Keywords: Corruption, growth, reform, panel data
    JEL: C33 D73 K42
    Date: 2009–05
  11. By: Thomas Otter
    Abstract: Latin America is the most unequal region of the world in terms of income or expenditure, as well as regarding other aspects of economic or social exclusion. The region suffered the lost decade of the nineteen eighties, and experienced a modest recovery in the nineteen nineties. In the nineteen nineties, most of the governments implemented stabilization politics, more or less close to the proposals of the Washington Consensus. Paraguay itself, however, neither suffered a debt crisis nor a mayor economic instability during the eighties, so the stabilization policies would not have been necessary or useful for the Paraguayan economy and business cycles in the nineties. Nevertheless, many of the macroeconomic policies applied in Paraguay during the nineties were close to the Washington Consensus. The most striking macroeconomic result of the decade was a per capita income decrease beginning in late 1995, hand in hand with a poverty increase after 1996. Given the persistently high levels of poverty incidence in Paraguay to date, understanding the determinants of growth at the household level in Paraguayan economy remains an important but under-researched field in economics. This appears to be particularly true for the question whether inequality has a positive or negative effect on economic growth, a question that is both fundamental in (development) economics and highly relevant for poverty reduction policies. Although the effect of inequality on growth has important implications for poverty (Bourguignon, 2004; Ravallion, 1997), empirical evidence on this link is virtually inexistent for Paraguay.
    Date: 2009–05–05
  12. By: David De La Croix (CORE - Department of Economics - Université Catholique de Louvain); Michel Lubrano (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: The ELIE scheme of Kolm taxes labour capacities instead of labour income in order to circumvent the distortionary effect of taxation on labour supply. Still, Kolm does not study the impact of ELIE on human capital formation and investment. In this paper, we build an overlapping generations (OLG) model with heterogenous agents and endogenous growth driven by investment in human capital. We study the effect of ELIE on education investment and other aggregate economic variables. Calibrating the model to French data, we highlight a tradeoff between growth and redistribution. With a perfect credit market, ELIE is successful in reducing inequalities and poverty, but it is at the expense of lower investment in education and slower growth. In an economy with an imperfect credit market where individuals cannot borrow to educate, the tradeoff between growth and redistribution is not overturned but is less severe. However, it is possible to overturn completely that trade-off simply by changing the base of taxation for the young generation which is equivalent to subsidising education.
    Keywords: Education, Growth, Redistribution, Kolm
    Date: 2009–05–07
  13. By: Dramane Coulibaly (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper studies empirically the link between remittances and growth volatility by examining the impact of remittances on the propagation of real and monetary shocks. This study is conducted by employing dynamic panel generalized method of moment (GMM) technique for a sample of 63 countries over the 1980-2004 period. The volatility of terms of trade and inflation is used to proxy for real and monetary volatility, respectively. The results show that the impact of remittances on the propagation of shocks depends on the nature of shock. Precisely, the results show that remittances dampen the effect of terms of trade volatility, but, magnify the effect of inflation volatility. The results also suggest that the dampening effect of remittances on propagation of terms of trade volatility is greater in country with high level of financial development.
    Keywords: Remittances, financing constraints, volatility.
    JEL: F22 F24 O11
    Date: 2009–03
  14. By: Crescenzi, Riccardo (Robert Schuman Centre of the European University Institute, Florence); Rodriguez-Pose, Andres (London School of Economics)
    Abstract: This paper analyses the role of infrastructure endowment and investment in the genesis of regional growth in the European Union. It assesses the economic effects of the existence and improvement of transport networks in light of their interactions with innovation and local socio-economic conditions. The analysis accounts for spatial interactions between different regions in the form of spillovers and network externalities. The regression results highlight the impact of infrastructural endowment on regional economic performance, but also the weak contribution of additional investment. Regions having good transport infrastructure endowment and being well connected to regions with similar good endowments tend to grow faster. However, investment in infrastructure within a region or in neighbouring regions seems to leave especially peripheral regions more vulnerable to competition. Furthermore, the positive impact of infrastructure endowment on growth tends to wane quickly and is weaker than that of, for example, the level of human capital.
    Keywords: Economic growth; infrastructure; transport network; investment; innovation; spillovers; regions; endowment
    JEL: R11 R12 R42 R58
    Date: 2008–07–18

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