nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒07‒11
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Productivity shocks and aggregate cycles in an estimated endogenous growth model By Jim Malley; Ulrich Woitek
  2. Should Financial Flows Be Regulated? Yes By Gerald Epstein
  4. Regional growth and finance in Europe: Is there a quality effect of bank efficiency? By Hasan, Iftekhar; Koetter , Michael; Wedow, Michael
  5. Financial Development and TFP Growth: Cross-Country and Industry-Level Evidence By Francisco Arizala; Eduardo Cavallo; Arturo Galindo
  6. Growth with imported resources: On the sustainability of U.S. growth and foreign debt By Ziesemer, Thomas
  7. TFP Growth in Old and New Europe By Michael C. Burda; Battista Severgnini
  8. Natural disasters and growth - going beyond the averages By Loayza, Norman; Olaberria, Eduardo; Rigolini, Jamele; Christiaensen, Luc
  9. Pro-Poor Growth Using Non-Income Indicators: An Empirical Illustration for Colombia By Adriana Cardozo; Melanie Grosse

  1. By: Jim Malley; Ulrich Woitek
    Abstract: Using a two-sector endogenous growth model, this paper explores how productivity shocks in the goods and human capital producing sectors contribute to explaining aggregate cycles in output, consump- tion, investment and hours. To contextualize our findings, we also assess whether the human capital model or the standard real business cycle (RBC) model better explains the observed variation in these aggregates. We find that while neither of the workhorse growth mod- els uniformly dominates the other across all variables and forecast horizons, the two-sector model provides a far better fit to the data. Some other key results are first, that Hicks-neutral shocks explain a greater share of output and consumption variation at shorter-forecast horizons whereas human capital productivity innovations dominate at longer ones. Second, the combined explanatory power of the two technology shocks in the human capital model is greater than the Hicks-neutral shock in the RBC model in the medium- and long-term for output and consumption. Finally, the RBC model outperforms the two-sector model with respect to explaining the observed variation in investment and hours.
    Keywords: endogenous growth, human capital, real business cycles, Bayesian estimation, VAR errors
    JEL: C11 C52 E32
    Date: 2009–06
  2. By: Gerald Epstein
    Abstract: As the international financial crisis spreads, some governments are using “unconventional tools” of monetary and financial policy to protect themselves. Should policies to control international capital flows be part of the government “toolkit” in these difficult times? This essay answers: YES. It describes the economic arguments for and against using capital controls, prudential regulations and other “capital management techniques” to manage international financial flows, presents empirical evidence on their impacts, and describes the variety of policies that many countries have successfully applied to enhance macroeconomic and financial stability, create policy space, and achieve other national development goals.
    Keywords: Sub-sovereign bonds, infrastructure finance, issuers, investors, financial sector, municipal finance
    JEL: E5 F3 F4 O1 O16 O19
    Date: 2009–07
  3. By: Pradhan, Jaya Prakash
    Abstract: Surpassing the decoupling expectation, the global economic crisis is now spreading into Indian economy through various channels. Indeed, this brief survey of the effects of crisis suggests that India’s financial and real sectors are closely integrated with the global financial and export markets. So far crisis has shown just how it can undermine India’s growth rate, which in turn likely to have long-term implications for economic and social developments in the country.
    Keywords: Financial crisis, economic slowdown, growth
    JEL: G15 N25 N15 F43
    Date: 2009–06–08
  4. By: Hasan, Iftekhar (Lally School of Management and Technology, USA, and Bank of Finland Research); Koetter , Michael (University of Groningen and Deutsche Bundesbank); Wedow, Michael (Deutsche Bundesbank)
    Abstract: In this study, we test whether regional growth in 11 European countries depends on financial development and suggest the use of cost- and profit-efficiency estimates as quality measures for financial institutions. Contrary to the usual quantitative proxies for financial development, the quality of financial institutions is measured in this study as the relative ability of banks to intermediate funds. An improvement in bank efficiency spurs five times more regional growth than does an identical increase in credit. More credit provided by efficient banks exerts an independent growth effect in addition to the direct quantity and quality channel effects.
    Keywords: bank performance; regional growth; bank efficiency; Europe
    JEL: G21 O16 O47 O52
    Date: 2009–05–18
  5. By: Francisco Arizala; Eduardo Cavallo; Arturo Galindo
    Abstract: This paper estimates the impact of financial development on industry-level total factor productivity (TFP) growth using a largely unexploited panel of 77 countries with data for 26 manufacturing industries for the years 1963 to 2003. A significant relationship is found between financial development and industry-level TFP growth when controlling for country-time and industry-time fixed effects. The results are both statistically and economically significant. TFP growth can accelerate up to 0.6 percent per year, depending on the external finance requirement of industries, following a one standard deviation increase in financial development. The results are robust to different samples and specifications.
    Keywords: Financial development, TFP growth, Volatility
    JEL: D24 E44 O47
    Date: 2009–06
  6. By: Ziesemer, Thomas (UNU-MERIT, and Maastricht University)
    Abstract: We provide a growth model with imported resources and foreign debt accumulation providing the basis for two questions and regression equations. 1) Under what conditions do growth rates of per capita income remain positive if imported inputs such as oil have increasing real prices? 2) Is accumulation of foreign debt driven by a current account deficit of which two percent of the GDP stem from oil imports, sustainable? For both questions we provide estimates for the USA with the following results. Oil price growth rates have only a marginal impact on those of GDP per capita as long as they exceed inflation rates by not much more than they did in the past. The US foreign debt/GDP ratio follows an unstable difference equation and therefore is not sustainable. We briefly discuss possible future stabilization through the market and through policies.
    Keywords: capital movements, growth, sustainability
    JEL: F21 O41 Q01
    Date: 2009
  7. By: Michael C. Burda; Battista Severgnini
    Abstract: Using Solow-Tornqvist residuals as well as two alternative measurements, we present estimates of total factor productivity (TFP) growth in a sample of 30 European economies for the period 1994-2005. In most of Western Europe, we find a deceleration of TFP growth since 2000. However, the economies of New Europe exhibit a higher level of TFP growth overall and have slowed less than those of Old Europe. In the new market economies of Central and Eastern Europe, we nd both high TFP growth as well as acceleration in the second half of the sample. Regression evidence from Western Europe suggests that product market regulation may adversely aect TFP growth and may thus impair convergence.
    Keywords: Total factor productivity growth, Solow residual, product and labor market regulation
    JEL: D24 O47 P27
    Date: 2009–06
  8. By: Loayza, Norman; Olaberria, Eduardo; Rigolini, Jamele; Christiaensen, Luc
    Abstract: There has been a steady increase in the occurrence of natural disasters. Yet their effect on economic growth remains unclear, with some studies reporting negative, and others indicating no, or even positive effects. These seemingly contradictory findings can be reconciled by exploring the effects of natural disasters on growth separately by disaster and economic sector. This is consistent with the insights from traditional models of economic growth, where production depends on total factor productivity, the provision of intermediate outputs, and the capital-labor ratio, as well as the existence of important intersector linkages. Applying a dynamic Generalized Method of Moments panel estimator to a 1961-2005 cross-country panel, three major insights emerge. First, disasters affect economic growth - but not always negatively, and differently across disasters and economic sectors. Second, although moderate disasters can have a positive growth effect in some sectors, severe disasters do not. Third, growth in developing countries is more sensitive to natural disasters - more sectors are affected and the magnitudes are non-trivial.
    Keywords: Natural Disasters,Disaster Management,Hazard Risk Management,Achieving Shared Growth,Economic Conditions and Volatility
    Date: 2009–06–01
  9. By: Adriana Cardozo (University of Göttingen / Germany); Melanie Grosse (University of Göttingen / Germany)
    Abstract: In this paper, we analyze how the distribution of selected non-income welfare indicators changed between 1997 and 2003 in Colombia. We use multidimensional pro-poor growth measurement techniques and create indices for assets, health, education, and subjective welfare using two alternative weighing techniques: polychoric principal components and normatively selected weights. Results show that while income and expenditures fluctuated according to economic growth, reflecting the effects of the 1999 economic crisis, non-income indicators had minor changes. While income and expenditures decreased for all income percentiles, and relatively more for the richest, the non-income dimensions stagnated and remained in 2003 as unequally distributed as in 1997.
    Keywords: Pro-Poor Growth, Inequality, Welfare Measurement, Multidimensionality of Poverty, Latin America, Colombia
    JEL: D30 I30 O10 O12
    Date: 2009–06–24

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