nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒08‒22
five papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Human Capital and Technological Progress as the Determinants of Economic Growth By Krzysztof Cichy
  2. Optimal Economic Growth Using Fiscal and Monetary Policies By Hassan Bougrine; Teppo Rakkolainen
  3. Productivity Growth and Capital Flows: The Dynamics of Reforms By Francisco J. Buera; Yongseok Shin
  4. Patience and Prosperity By Strulik, Holger
  5. Pareto Distributions in Economics Growth Models By Nirei, Makoto

  1. By: Krzysztof Cichy
    Date: 2009–06
  2. By: Hassan Bougrine; Teppo Rakkolainen
    Abstract: The literature on growth theory is rich with models attempting to explain growth differences among countries. Several variables have been proposed many of which were found to be positively related to growth. However, a major problem with these models is that the factors explaining growth are endogenously determined by their environment so that a slow-growing or a poor country will find itself helpless because all the crucial variables it has `inherited' are either deficient or inexistent. We propose policyoriented model that empowers (poor or slow-growing) countries in the sense that they can use economic policies to achieve high growth and eliminate the gap of unused productive capacity of society. We demonstrate that such objectives are possible by manipulating some key control variables, namely the rate of interest and the net government spending.
    Keywords: growth, maximization, fiscal policy, interest rates, deficit, money
    JEL: O11 O23 H2 H3
    Date: 2009–05
  3. By: Francisco J. Buera; Yongseok Shin
    Abstract: Why doesn’t capital flow into fast-growing countries? In this paper, we provide a quantitative framework incorporating heterogeneous producers and underdeveloped domestic financial markets to study the joint dynamics of total factor productivity (TFP) and capital flows. When an unexpected once-and-for-all reform eliminates non-financial distortions and liberalizes capital flows, the TFP of our model economy rises gradually and capital flows out of it. The rise in TFP reflects efficient reallocation of capital and talent, a process drawn out by frictions in domestic financial markets. The concurrent capital outflows are driven by the positive response of domestic saving to higher returns, and by the sluggish response of domestic investment to the higher TFP—the latter being another ramification of domestic financial frictions. We use our model to analyze the welfare consequences of opening up capital accounts. We find that the marginal welfare effect of capital account liberalization is negative for workers and positive for entrepreneurs and wealthy individuals.
    JEL: E44 F21 F32 F43 O16
    Date: 2009–08
  4. By: Strulik, Holger
    Abstract: This paper introduces wealth-dependent time preference into a simple model of endogenous growth. The model generates adjustment dynamics in line with the historical facts on savings and economic growth in Europe from the High Middle Ages to today. Along a virtuous cycle of development more wealth leads to more patience, which leads to more savings and even higher wealth. Savings rates and income growth rates are thus jointly increasing during the process of development until they converge towards constants along a balanced growth path. During the transition to modern growth an economy in which the association of wealth and patience is stronger overtakes an otherwise identical economy and generates temporarily diverging growth rates. It is shown how wealth-dependent time preference can explain the existence of a locally stable poverty trap as well as the phenomenon of simultaneously falling interest rates and rising growth rates.
    Keywords: economic growth, savings, time preference, poverty trap, moral consequences of economic growth.
    JEL: O11 O41 D90 P48
    Date: 2009–07
  5. By: Nirei, Makoto
    Abstract: This paper analytically demonstrates that the tails of income and wealth distributions converge to a Pareto distribution in a variation of the Solow or Ramsey growth model where households bear idiosyncratic investment shocks. The Pareto exponent is shown to be decreasing in the shock variance, increasing in the growth rate, and increased by redistribution policies by income or bequest tax. Simulations show that even in the short run the exponent is affected by those fundamentals. We argue that the Pareto exponent is determined by the balance between the savings from labor income and the asset income contributed by risk-taking behavior.
    Date: 2009–07

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