nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒08‒30
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial Openness and Growth in 213 Countries: A Finance and Growth Panel Dataset By Joseph Francois; Gus Garita; Julia Swart
  2. On the non-causal link between volatility and growth By Olaf Posch; Klaus Wälde
  3. High-growth Recoveries, Inventories and the Great Moderation By Maximo Camacho; Gabriel Perez-Quiros; Hugo Rodríguez Mendizábal
  4. Economic growth across Chinese provinces: in search of innovation-driven gains By Funke, Michael; Yu, Hao
  5. A Simple Model of the Financial Crisis of 2007-9 with Implications for the Design of a Stimulus Package By Kaushik Basu
  6. Human Capital, Talent, Agglomeration and Regional Growth By Karlsson, Charlie; Johansson, Börje; Stough, Roger R.
  7. Inflation, Liquidity Risk and Long-run TFP - Growth By Evers, Michael; Niemann, Stefan; Schiffbauer, Marc
  8. Fiscal stimulus for debt intolerant countries? By Reinhart, Carmen; Reinhart, Vincent
  9. Growth, Fiscal Policy and the Informal Sector in a Small Open Economy By Gui Pedro de Mendonça
  10. Internal vs. External Habit Formation in a Growing Economy with Overlapping Generations By Masako Ikefuji; Kazuo Mino
  11. Statistical modelling of financial crashes: Rapid growth, illusion of certainty and contagion By John M. Fry
  12. Fiscal Policy Cyclicality and Growth within the U.S. States By Ayako Kondo; Justin Svec
  13. Lenders of Last Resort in a Globalized World By Maurice Obstfeld

  1. By: Joseph Francois (Johannes Kepler University Linz); Gus Garita (Tinbergen Institute and Erasmus University); Julia Swart (Tinbergen Institute and Erasmus University)
    Abstract: In this paper, we provide information on an extended and improved version to the economic growth dataset as initially constructed by Eschenbach, Francois, and Nitzsche (2003). We give detailed information on the variables included in the Finance and Growth Panel dataset (FGPD) and on the respective data sources. This new dataset contains over 230 variables and covers 213 countries for the period 1970-2007. The main building blocks of the database are variables on economic growth and related macroeconomic performance, quality of institutions, and financial (openness) indicators. NOTE the *.zip archive includes the database in Excel format, and the background paper describing the data set.
    Keywords: Macroeconomic Statistics, Financial Development, Economic development
    JEL: C82 C88 O1
    Date: 2009–08
  2. By: Olaf Posch (School of Economics and Management, University of Aarhus, Denmark); Klaus Wälde (University of Mainz)
    Abstract: A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the effects through which economies with different tax levels dier both in their volatility and growth. Using a continuous-time DSGE model with plausible parametric restrictions, we obtain closedform measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely.
    Keywords: Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models
    JEL: E32 E62 H3 C65
    Date: 2009–08–18
  3. By: Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España); Hugo Rodríguez Mendizábal (Instituto de Análisis Económico (CSIC))
    Abstract: We present evidence about the loss of the so-called "plucking effect", that is, a high-growth phase of the cycle typically observed at the end of recessions. This result matches the belief, presented informally by different authors, that recession may have now permanent effects, or recession have now an L shape versus old-time recessions that always had a V shape. We also show that the loss of the "plucking effect" can explain part of the Great Moderation. We postulate that these two phenomena may be due to changes in inventory management brought about by improvements in information and communications technologies.
    Keywords: Business cycle features, Great Moderation, High-growth recovery
    JEL: E32 F02 C22
    Date: 2009–08
  4. By: Funke, Michael (BOFIT); Yu, Hao (BOFIT)
    Abstract: In this paper we analyse the impact of R&D on total factor productivity across Chinese provinces. We introduce innovations explicitly into a production function and evaluate their contribution to economic growth in 1993 - 2006. The empirical results highlight the importance and the interaction between local and external research. The evidence indicates that growth in China is not explained simply by factor input accumulation.
    Keywords: China; R&D; R&D Spillovers; patents; regional economic growth; semiparametric estimators
    JEL: C14 O47 R11 R12
    Date: 2009–08–26
  5. By: Kaushik Basu
    Abstract: The financial crisis of 2007-09 began as a local problem in the mortgage finance market in the United States and Europe but, within months, escalated into a general global financial crisis, resulting in collapsing investment not just in developed nations but also in Shanghai, Rio and Mumbai, and has led to a general recession worldwide. The paper builds a rational-expectations, microeconomic model of why the local crisis escalated into a general freeze in credit flows. It then isolates two very different kinds of interventions needed to restore the economy back to health, arguing that government stimulus policy has not had enough impact because a failure to understand the need for the dual intervention.
    Keywords: United states, financial crisis, recession, multiple equilibria, credit markets, credit ratings, mortgage finance, finance, Mumbai, developed nations, Shanghai, Rio, microeconmic, economy, health, government, credit, investment, market,
    Date: 2009
  6. By: Karlsson, Charlie (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Johansson, Börje (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Stough, Roger R. (School of Public Policy, George Mason University)
    Abstract: This paper is an introductory overview highlighting some of the current knowledge as regards three critical questions related to the emerging knowledge economy: i) Why does human capital and talent tend to agglomerate in large urban regions?, ii) How does this agglomeration affect the location of different types of economic activities?, and iii) How does this agglomeration affect regional growth? There are different underlying agglomerative forces creating spatially concentrated increasing returns to scale. Also, cities become centres of various amenities due to general increases in real incomes offering people spare time activities. One major reason for the agglomeration of production in urban regions and metro¬politan areas today is the existence of various positive externalities, providing good settings for industries and firms with knowledge-intensive and knowledge-creation activities, specialised business service firms and headquarters of multinational firms. There are strong tentative empirical evidences that the agglomeration of human capital contributes to regional development and growth. However, there is uncertainty concerning the size of the human capital externalities.
    Keywords: Human Capital Externalities; Talent; Knowledge Creation; Knowledge Spillover; Agglomeration; Urban Region; Regional Growth
    JEL: D62 D83 J24 R12 R23
    Date: 2009–08–26
  7. By: Evers, Michael; Niemann, Stefan; Schiffbauer, Marc (ESRI)
    Abstract: This paper demonstrates a negative relation between inflation and long-run productivity growth. Inflation generates long-run real effects due to a link from the short-run nominal and financial frictions to a firm's qualitative investment portfolio. We develop an endogenous growth model whose key ingredients are (i) a nominal short-run portfolio choice for households, (ii) an agency problem which gives rise to financial market incompleteness, (iii) a firm-level technology choice between a return-dominated but secure and a more productive but risky project. In this framework, inflation increases the costs of corporate insurance against productive but risky projects and hence a firm's choice of technology. It follows that each level of inflation is associated with a different long-run balanced growth path for the economy as long as financial markets are incomplete. Finally, we apply U.S. industry and firm level data to examine the relevance of our specific microeconomic mechanism. We find that (i) firms insure systematically against risky R&D investments by means of corporate liquidity holdings, (ii) periods of higher inflation restrain firm-level R&D investments by reducing corporate liquidity holdings.
    Date: 2009
  8. By: Reinhart, Carmen; Reinhart, Vincent
    Abstract: Fashions are hard to resist, and it is now fashionable in much of the North to rely on a fiscal engine of growth. As for emerging markets, however, boosting spending at a time in which revenues are contracting or, in many cases, collapsing for an uncertain period of time is an more complicated matter. Policymakers would do well to keep four risks in mind. Fiscal multipliers: North and South; Emerging markets and global crowding out; Domestic debt is no panacea; and Above all--remember debt intolerance!
    Keywords: fiscal stimulus; debt; financial crises; procyclical policies
    JEL: F00 E50 E60
    Date: 2009–08
  9. By: Gui Pedro de Mendonça
    Abstract: We discuss the implications of informality on growth and fiscal policy by considering an informal sector based on low tech firms, in an open economy model of endogenous growth, where labour supply is elastic and increasing returns arise from public spending. We allow for both labour and capital to allocate between sectors and examine the dynamic and policy issues that arise in an economy, where long run outcomes are still dominated by formal activities, but long macroeconomic transitions arise as a result of informal microeconomic activities, which take advantage of both government taxation and limited fiscalization.
    Keywords: Endogenous Growth Theory; Optimal Fiscal Policy; Informal Sector; Public Capital.
    JEL: C61 E62 F43 O17 O41
    Date: 2009–08–16
  10. By: Masako Ikefuji (Institute of School and Economic Research, Osaka University); Kazuo Mino (Institute of Economic Research, Kyoto University)
    Abstract: This paper explores the roles of internal and external habit formation in a simple model of endogenous growth with overlapping generations. Unlike the representative agent settings in which the distinction between internal and external habits may not yield significant qualitative differences in working of the model economy, we show that the internal and external habit persistence in overlapping generations economies may have qualitatively different effects on the steady-state characterization as well as on the dynamic behavior of the economy. We also confirm that in an overlapping generations framework, whether the habits in the utility function takes subtractive or multiplicative forms may be critical both for long-run growth and for transitional dynamics.
    Keywords: internal habits formation, external habit formation, overlapping generations economy, long-run growth
    JEL: E32 J24 O40
    Date: 2009–08
  11. By: John M. Fry
    Abstract: We develop a rational expectations model of financial bubbles and study ways in which a generic risk-return interplay is incorporated into prices. We retain the interpretation of the leading Johansen-Ledoit-Sornette model, namely, that the price must rise prior to a crash in order to compensate a representative investor for the level of risk. This is accompanied, in our stochastic model, by an illusion of certainty as described by a decreasing volatility function. The basic model is then extended to incorporate multivariate bubbles and contagion, non-Gaussian models and models based on stochastic volatility. Only in a stochastic volatility model where the mean of the log-returns is considered fixed does volatility increase prior to a crash.
    Keywords: Financial crashes, super-exponential growth, illusion of certainty, contagion, housing-bubble.
    JEL: C00 E30 G10
    Date: 2009–10–08
  12. By: Ayako Kondo (Institute for Social and Economic Research, Osaka University); Justin Svec (Department of Economics, College of the Holy Cross)
    Abstract: We exploit differences in the stringency of balanced budget rules across US states to estimate the effect of fiscal policy cyclicality on state GDP growth. While most states have passed laws restricting deficits, the nature and strictness of these laws vary greatly. States with more stringent balanced budget restrictions run more procyclical fiscal policy. We use the diversity in these laws as an instrument for the cyclicality of state government spending. We find modest evidence that more counter-cyclical public expenditure increases a state's average growth rate per capita. Further, our point estimates suggest that a state could increase its annual growth rate by 0.4% by relaxing the "ex-post" balanced budget restriction. This estimated effect is statistically significant at the 10% level in our basic specification, but loses its significance when we control for the initial debt to GDP ratio.
    Keywords: growth, fiscal policy, cyclicality
    JEL: E32 E62 H72
    Date: 2009–08
  13. By: Maurice Obstfeld (Professor, University of California, Berkeley (E-mail:
    Abstract: The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last- resort lender that channels central bank liquidity where it is needed. The IMF's effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.
    Keywords: Lender of Last Resort, Financial Crisis, Central Banking, International Monetary System, International Monetary Fund
    JEL: E58 F33 F36
    Date: 2009–08

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