nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒06‒03
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. When economic growth is less than exponential By Christian Groth; Karl-Josef Koch; Thomas M. Steger
  2. Endogenous Health Investment, Saving and Growth - A theoretical study with an application to Chinese data By Chen, Yan
  3. Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis By Didier SORNETTE; Ryan WOODARD
  4. On Growth and Development. By Mina Baliamoune-Lutz
  5. Predicting Systematic Risk: Implications from Growth Options By Éric Jacquier; Sheridan Titman; Atakan Yalçin
  6. Decentralization of social protection expenditure and economic growth: A cross-country analysis By Roberto Ezcurra; Andrés Rodríguez-Pose
  7. The international trade as the sole engine of growth for an economy By Carmen D. Álvarez-Albelo; Antonio Manresa; Monica Pigem-Vigo
  8. A Stochastic Growth Model with Income Tax Evasion: Implications for Australia By Ratbek Dzhumashev; Emin Gahramanov
  9. Polluting Non-Renewable Resources, Carbon Abatement and Climate Policy in a Romer Growth Model By GRIMAUD, André; MAGNE, Bertrand; ROUGE, Luc

  1. By: Christian Groth; Karl-Josef Koch; Thomas M. Steger
    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) serves 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
    Date: 2009
  2. By: Chen, Yan (Department of Economics)
    Abstract: The idea behind this thesis stems from the existing abundance of empirical studies suggesting the strong correlation between longevity and economic growth. In a simple two period overlappinggeneration framework, we establish a direct link between health investment and economic growth through endogenous survival rate. We find that health expenditure complements saving in equilibrium, thereby contributes to economic growth, which in turn leads to a further increase in health investment. The simulation with calibrated parameters also manifests the consistence between our results and the worldwide data as well as the fact of China.
    Keywords: health investment; economic growth; China
    JEL: I31
    Date: 2009–06–03
  3. By: Didier SORNETTE (ETH Zurich and Swiss Finance Institute); Ryan WOODARD (ETH Zurich)
    Abstract: The financial crisis of 2008, which started with an initially well-defined epicenter focused on mortgage backed securities (MBS), has been cascading into a global economic recession, whose increasing severity and uncertain duration has led and is continuing to lead to massive losses and damage for billions of people. Heavy central bank interventions and government spending programs have been launched worldwide and especially in the USA and Europe, with the hope to unfreeze credit and boltster consumption. Here, we present evidence and articulate a general framework that allows one to diagnose the fundamental cause of the unfolding financial and economic crisis: the accumulation of several bubbles and their interplay andmutual reinforcement has led to an illusion of a “perpetual money machine” allowing financial institutions to extract wealth from an unsustainable artificial process. Taking stock of this diagnostic, we conclude that many of the interventions to address the so-called liquidity crisis and to encourage more consumption are ill-advised and even dangerous, given that precautionary reserves were not accumulated in the “good times” but that huge liabilities were. The most “interesting” present times constitute unique opportunities but also great challenges, for which we offer a few recommendations.
    Keywords: Financial crisis, bubbles, real estate, derivatives, out-of-equilibrium, super-exponential growth, crashes, complex systems
    JEL: O16
  4. By: Mina Baliamoune-Lutz
    Abstract: We examines how institutional and policy reforms affect the relationship between entreprene urship and growth. We perform Arellano-Bond GMM estimations on annual data (over the period 1990-2002) from a large group of developing countries and focus in particular on the interplay between policy and institutional reforms and entrepreneurship. We find that the joint effect of trade reform and entrepreneurship on growth is negative, suggesting that trade reform diminishes the positive effects of entrepreneurial ability on growth, while the joint effect of financial sector reform and entrepreneurship has a non- linear impact on growth. Financial sector reforms enhance the growth effects of entrepreneurship at initial levels and diminish it a high levels of reform. In addition, we find that the interplay of institutional reform and entrepreneurship does not seem to matter for the growth effects of entrepreneurship.
    Keywords: growth, entrepreneurship, institutions, policy reform
    JEL: E6 O1 O4
    Date: 2008–06
  5. By: Éric Jacquier; Sheridan Titman; Atakan Yalçin
    Abstract: Via the well-known financial leverage effect, decreases in stock prices cause an increase in the levered equity beta for a given unlevered equity beta. However, as growth options are more volatile and have higher risk than assets in place, a price decrease may decrease the unlevered equity beta via an “operating leverage” effect. This is because decreases in prices can be associated with a proportionately higher loss in growth options than in assets in place. Most of the existing literature focuses on the financial leverage effect. This paper examines both effects. Our empirical results show that, contrary to common belief, the operating leverage effect largely dominates the financial leverage effect, even for highly levered firms that presumably have few growth options. We link variations in betas to measurable firm characteristics that proxy for the proportion of the firm invested in growth options. We show that these proxies jointly predict a large fraction of cross-sectional differences in betas. These results have important implications on the predictability of equity betas, hence on empirical asset pricing and on portfolio optimization that controls for systematic risk. <P>En vertu de l’effet de levier financier bien connu, les baisses du cours des actions produisent une hausse du bêta des capitaux propres avec facteur d’endettement par rapport à un bêta donné des capitaux propres sans facteur d’endettement. Toutefois, étant donné que les options de croissance sont plus volatiles et présentent un risque plus élevé que les actifs en place, une baisse de leur prix peut contribuer à diminuer le bêta des capitaux propres sans facteur d’endettement à cause de l’effet de « levier d’exploitation ». Ce phénomène s’explique par le fait que les baisses de prix peuvent être associées à une perte proportionnellement plus élevée dans le cas des options de croissance par rapport aux actifs en place. La plupart des études existantes mettent l’accent sur l’effet de levier financier. Le document actuel se penche sur les deux effets. Nos résultats empiriques démontrent que, contrairement à la croyance répandue, l’effet de levier d’exploitation domine largement l’effet de levier financier, même dans le cas des firmes dont le facteur d’endettement est élevé et qui, vraisemblablement, ont peu d’options de croissance. Nous établissons un lien entre les variations dans les bêtas et les caractéristiques mesurables des firmes qui représentent la proportion investie dans les options de croissance. Nous démontrons que ces données indirectes prédisent conjointement une forte proportion de différences transversales dans les bêtas. Les résultats ont une incidence importante sur la prévisibilité des bêtas des capitaux propres et, par le fait même, sur la fixation empirique des prix des actifs et sur l’optimisation du portefeuille qui limite le risque systématique.
    Keywords: financial leverage effect, growth options, risk , effet de levier financier, options de croissance, risque
    Date: 2009–05–01
  6. By: Roberto Ezcurra (Universidad Pública de Navarra); Andrés Rodríguez-Pose (London School of Economics)
    Abstract: This paper examines the effect of the degree of decentralization of social protection expenditure on economic growth, using panel data for 25 countries over the period 1990-2005. Our results show a positive impact on economic performance of the subnational share in total government expenditure on social protection. This finding is in fact robust to the inclusion of additional explanatory variables in the analysis and is not driven by any specific country.
    Keywords: decentralization; social protection expenditure; economic growth; panel data techniques
    Date: 2009–05–25
  7. By: Carmen D. Álvarez-Albelo (Departamento de Análisis Económico, Facultad de Ciencias Económicas, Universidad de La Laguna and CREB); Antonio Manresa (CREB, Universitat de Barcelona); Monica Pigem-Vigo (CREB, Universitat de Barcelona)
    Abstract: Can international trade act as the sole engine of growth for an economy? If yes, what are the mechanisms through which trade operates in transmitting permanent growth? This paper answers these questions with two simple two-country models, in which only one country enjoys sustained growth in autarky. The models differ in the assumptions on technical change, which is either labour- or capital-augmenting. In both cases, the stagnant economy imports growth by trading. In the first model, growth is transmitted because of permanent increases in the trade volume. In the alternative framework, the stagnant economy imports sustained growth because its terms of trade permanently improve.
    Keywords: international trade; stagnant economies; growth transmission; mechanisms of transmission.
    JEL: F43 O33 O41
    Date: 2009–06
  8. By: Ratbek Dzhumashev; Emin Gahramanov
    Abstract: In this paper we develop a stochastic endogenous growth model augmented with income tax evasion. Our model avoids some existing discrepancies between empirical evidence and theoretical predictions of traditional tax evasion models. Further, we show that: i) productive government expenditures play an important role in affecting economy's tax evasion rate; ii) the average marginal income tax rate in Australia come close to the optimal; and iii) the phenomenon of tax evasion is not an excuse for a productive government to advocate an excessive income taxation.
    Keywords: Tax evasion; Economic growth; Public services
    JEL: H26 D91 O41
    Date: 2009–10–15
  9. By: GRIMAUD, André (Toulouse School of Economics (IDEI and LERNA)); MAGNE, Bertrand (International Energy Agency); ROUGE, Luc (Université de Toulouse, Toulouse Business School)
    JEL: O32 O41 Q20 Q32
    Date: 2009–03

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