nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒07‒03
thirteen 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. Employment Promoting Growth in Bangladesh: Monetary and Financial Sector Issues By Mustafa. K. Mujeri
  3. Is Government Ownership of Banks Really Harmful to Growth? By Svetlana Andrianova; Panicos Demetriades; Anja Shortland
  4. After Hubris, Smoke and Mirrors, The Downward Spiral: Financial and real markets pull each other down; how can policy reverse this? By Edward Nell and Willi Semmler
  6. The role of education in regional innovation activities and economic growth: spatial evidence from China By Chi, Wei; Qian, Xiaoye
  7. Money and Endogenous Growth in a Cash-in-Advance Model with Social Status By Hung-Ju Chen; Jang-Ting Guo
  8. Disaggregated Credit Flows and Growth in Central Europe By Bezemer, Dirk J
  9. Mind the Break! Accounting for Changing Patterns of Growth during Transition By Jan Fidrmuc; Ariane Tichit
  10. Exploring the links between corruption and growth By Andrew Hodge; Sriram Shankar; D.S. Prasada Rao; Alan Duhs
  11. A New Debt Crisis? Assessing the impact of the financial crisis on developing countries By Sarah Edwards
  12. “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models By Bezemer, Dirk J
  13. Capital Taxation, Long-run Growth, and Bequests By Lars Kunze

  1. By: Christian Groth (Department of Economics, University of Copenhagen and EPRU, DK-1455 Copenhagen); Karl-Josef Koch (School of Economic Disciplines, University of Siegen, D-57068 Siegen); Thomas M. Steger (Institute for Theoretical Economics, University of Leipzig and CESifo, D-04109 Leipzig)
    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
    JEL: O31 O40 O41
    Date: 2009
  2. By: Mustafa. K. Mujeri
    Abstract: Although economic growth has improved in recent years in Bangladesh, the better economic performance has not translated into satisfactory poverty reduction. The type of growth that matters Bangladesh is the one that creates employment opportunities especially for the poor. In Bangladesh, monetary policy can create better employment opportunities with a well functioning financial sector having capability to ensure adequate resource flows to socially productive uses. On the contrary, such a monetary regime may contribute to high real interest rates impeding the realization of stipulated growth and poverty reduction. For success in reducing poverty, complementary policies to increase the economic mobility of the poor and raise their average returns to labor are also crucial.[PAU 0904]
    Keywords: Bangladesh; economic growth; employment; monetary policy; financial sector
    Date: 2009
  3. By: Svetlana Andrianova; Panicos Demetriades; Anja Shortland
    Abstract: We show that previous results suggesting that government ownership of banks has a negative effect on economic growth are not robust to adding more 'fundamental' determinants of economic grwoth, such as institutions. We also present regression results from a more recent period (1995-2007) which suggest that, if anything, government ownership of banks has been associated with higher long run growth rates, even after controlling for institutions and other variables suggested by the growth literature. Drawing on the current global financial crisis, we provide a conceptual framework which explains why under certain circumstances government owned banks could have a greater effect on economic growth than privately-owned banks.
    Date: 2009–05
  4. By: Edward Nell and Willi Semmler (New School for Social Research, New York, NY)
    Keywords: financial crisis; real estate bubble; recession
    Date: 2009–05
  5. By: Curak, Marijana (University of Split); Poposki, Klime (University St. Kliment Ohridski); Ecim, Tanja (University of Split)
    Abstract: In an endogenous growth framework, well developed and efficient financial system can promote economic growth. A number of empirical studies confirmed this hypothesis. Since the financial systems of transition countries are dominated by banks, in this paper we analyze the importance of banking industry for economic growth using methods of panel data analysis for 15 Central and Eastern European countries in the period from 1992 to 2006. Using variables that measure both quantitative and qualitative aspects of financial intermediation, our findings support the view that the effectiveness of banking industry is more important than its size per se for the economic growth in the Central and Eastern European countries.
    Keywords: banking; financial intermediation; endogenous growth; panel; Central and Eastern Europe
    JEL: C23 G21 O11 O16
    Date: 2009–06–16
  6. By: Chi, Wei; Qian, Xiaoye
    Abstract: This study examines one of the channels through which education may contribute to economic growth, specifically, innovation. Endogenous growth theory has long suggested that human capital lead to greater innovation and, through technology innovation and diffusion, contribute to economic growth. However, there is little evidence on the role of human capital in innovation. Using the Chinese provincial data from 1997 to 2006, we show that workers’ tertiary education is significantly and positively related to provincial innovative activities measured by invention patent applications per capita. This result does not vary when spatial dependence is allowed in the estimation. Thus, we find strong and robust evidence for the prediction of endogenous growth theory regarding the effect of human capital on innovation. However, we do not find the consistently significant effect of innovation on growth. This finding may, however, relate to the growth pattern in China.
    Keywords: Education; Human Capital; Innovation; Paten; Economic Growth; Spatial Analysis
    JEL: O1 O3
    Date: 2009–06
  7. By: Hung-Ju Chen (Department of Economics, National Taiwan University); Jang-Ting Guo (Department of Economics, University of California Riverside)
    Abstract: Motivated by the substantial increase of nominal money supply in the U.S. economy since late 2008, this paper examines the equilibrium growth effect of money/inflation within a standard one-sector AK model of endogenous growth with wealth-enhanced preferences for social status and the most generalized cash-in-advance constraint. We show that the sign for the correlation between money and output growth depends crucially on (i) the liquidity-constrained ratio of consumption to investment, and (ii) how the shadow price of physical capital responds to a change in the monetary growth rate. This money-growth correlation, as well as the growth effect of social status, turns out to be closely related to the local stability properties of the economy's balanced growth path(s).
    Keywords: Money, Endogenous Growth, Cash-in-Advance Constraint, Social Status, In- determinacy
    JEL: E52 O42
    Date: 2009–06
  8. By: Bezemer, Dirk J
    Abstract: The aim of this paper is to explore the link between credit and output in the context of a developed transition economy. Salient credit market features of these economies are (i) credit market imperfections leading to constraints on growth and (ii) the rapidly growing importance during transition of their financial sectors (the insurance, pension funds and real estate sectors). We develop a framework of credit and output including separate measures for credit to the real sector and financial sectors and for credit constraints, taking account of the role of trade credit. In our empirical work we focus on the Czech Republic because of the level of its financial development and data quality. In VAR and ARIMA analyses we find that our disaggregated measures for credit flows are better predictors of nominal growth than traditional, aggregate measures.
    Keywords: Credit; growth; transition; central Europe; Czech Republic
    JEL: E44
    Date: 2009–05
  9. By: Jan Fidrmuc; Ariane Tichit
    Abstract: We argue that econometric analyses of growth in post-communist countries are vulnerable to structural breaks across time and/or countries. We demonstrate this by identifying structural breaks in growth for 25 countries and over 18 years. The method we use allows identification of structural breaks at a-priori unknown points in space or time. The only prior assumption is that breaks occur in relation to progress in implementing market-oriented reforms. We find robust evidence that the pattern of growth in transition has changed at least three times, yelding four different models of growth associated with different stages of reform. The speed with which individual countries progress through these stages differs considerably.
    Date: 2009–02
  10. By: Andrew Hodge; Sriram Shankar; D.S. Prasada Rao; Alan Duhs (School of Economics, The University of Queensland)
    Abstract: Corruption is a widespread phenomenon, but relatively little is confidently known about its macroeconomic consequences. This paper explicitly models the transmission channels through which corruption indirectly affects growth. Results suggest that corruption hinders growth through its adverse effects on investment in physical capital, human capital, and political instability. Concurrently, corruption is found to foster growth by reducing government consumption and, less robustly, increasing trade openness. Overall, a total negative effect of corruption on growth is estimated from these channels. These effects are found to be robust to modifications in model specification, sample coverage, and estimation techniques as well as tests for model exhaustiveness. Moreover, the results appear supportive of the notion that the negative effect of corruption on growth is diminished in economies with low governance levels or a high degree of regulation. No one-size-fits-all policy response appears supportable.
    Date: 2009
  11. By: Sarah Edwards
    Abstract: This report is intended as a wake-up call to anyone who thinks the developing world debt crisis has been resolved. In fact, it assesses fears of a new debt crisis, more serious than before, spreading to nearly 40 countries. 38 of the 43 countries that the World Bank calculates are most vulnerable to the economic crisis already required substantial debt cancellation before the current crisis, in order to meet the needs of their people. As their situation considerably worsens, many more countries could join them. The solution lies in far-reaching reforms of the global economy which would ensure more responsible, sustainable and just lending whilst also reducing the dependence of developing countries on international capital
    Keywords: international debt, international capital, global economy, global economic reforms, World Bank, developing country debt, IMF, International Monetary Fund, international finance, Economics
    Date: 2009
  12. By: Bezemer, Dirk J
    Abstract: This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helped anticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstream policy and research did not. This study identifies core differences, traces their intellectual pedigrees, and includes case studies of both types of models. It so provides constructive recommendations on revising methods of financial stability assessment. Overall, the paper is a plea for research into the link between accounting concepts and practices and macro economic outcomes.
    Keywords: credit crisis, recession, prediction, macroeconomics, flow of funds, financialization, neoclassical economics, accounting research
    JEL: C53 E44 E37 E47
    Date: 2009–06–16
  13. By: Lars Kunze
    Abstract: It has been shown that higher capital taxes can have a growth-enhancing effect when combined with a revenue-compensating cut in wage taxes (Uhlig and Yanagawa 1996; European Economic Review 40, 1521–1540) or with an expansion in productivity-increasing public services (Rivas 2003;European Economic Review 47, 477–503).The present paper demonstrates that these results critically hinge on the existence of a bequest motive. It is shown that a wage-tax cut is no longer growth-enhancing when bequests are operative. By way of contrast, increasing productive public services may well boost growth. The theoretical findings are illustrated by numerical simulations based on US data.
    Keywords: Capital income taxation, public spending, overlapping generations, growth, family altruism
    JEL: D64 D91 H24 H50 O40
    Date: 2009–06

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