nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒09‒26
23 papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Disaggregated Credit Flows and Growth in Central Europe By Bezemer, Dirk J; Werner, Richard A
  2. What is Happening to the Impact of Financial Deepening on Economic Growth? By Peter L. Rousseau; Paul Wachtel
  3. The Global Economic Crisis after One Year: Is a New Paradigm for Recovery in Developing Countries Emerging? By Naude, Wim
  4. Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis By Didier Sornette; Ryan Woodard
  6. Lightning, IT Diffusion and Economic Growth across US States By Thomas Barnebeck Andersen; Jeanet Bentzen; Carl-Johan Dalgaard; Pablo Selaya
  7. Estimates of the level and growth effects of human capital in India By Rao, B. Bhaskara; Vadlamannati, Krishna Chaitanya
  8. Financial Innovation and Endogenous Growth By Stelios Michalopoulos; Luc Laeven; Ross Levine
  10. Financial Crises and Economic Activity By Stephen G. Cecchetti; Marion Kohler; Christian Upper
  11. FDI and Growth in Central and Southern Eastern Europe By Elvira Sapienza
  12. A Simple Model of the Financial Crisis of 2007-9 with Implications for the Design of a Stimulus Package By Basu, Kaushik
  13. Inflation, Finance, and Growth: A Trilateral Analysis By Peter L. Rousseau; Hakan Yilmazkuday
  14. Education Corruption, Reform, and Growth: Case of Post-Soviet Russia By Osipian, Ararat
  15. Economic Policy for Sustainable Growth and Development vs. Greedy Growth and Preservationism By Majah-Leah Ravago; James Roumasset;
  16. Corrupting Learning: Evidence from Missing Federal Education Funds in Brazil By Claudio Ferraz; Frederico Finan; Diana Belo Moreira
  17. Complementarity between private and public investment in R&D: A Dynamic Panel Data analysis By Sadraoui Tarek; Naceur Ben Zina
  18. Do Institutions Rule? The Role of Heterogeneity in the Institutions vs. Geography Debate By Andros Kourtellos; Thanasis Strengos; Chih Ming Tan
  19. On the uniqueness of classical solutions of Cauchy problems By Erhan Bayraktar; Hao Xing
  20. Holidays and the economic growth of nations By Amavilah, Voxi Heinrich
  21. Why the nature of oil shocks matters By Elisaveta Archanskaïa; Jerome Creel; Paul Hubert
  22. Product and Process Innovation in a Growth Model of Firm Selection By Cristiana Benedetti Fasil
  23. Random matching and money in the neoclassical growth model: some analytical results By Christopher J. Waller

  1. By: Bezemer, Dirk J; Werner, Richard A
    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
  2. By: Peter L. Rousseau (Department of Economics, Vanderbilt University); Paul Wachtel (Department of Economics & Sten School of Business, New York University)
    Abstract: Although the finance-growth relationship is now firmly entrenched in the empirical literature, we show that it is not as strong in more recent data as it was in the original studies with data for the period from 1960 to 1989. We consider several explanations. First, we find that the incidence of financial crises is related to the dampening of the effect of financial deepening on growth. Excessive financial deepening or too rapid growth of credit may have led to both inflation and weakened banking systems which in turn gave rise to growth-inhibiting financial crises. Excessive financial deepening may also be a result of widespread financial liberalizations in the late 1980s and early 1990s in countries that lacked the legal or regulatory infrastructure to exploit financial development successfully. However, we find little indication that liberalizations played an important direct in reducing the effect of finance. Similarly, there is little evidence that the growth of equity markets in recent years has substituted for debt financing and led to a reduced role of financial deepening on growth.
    Keywords: Finance-growth nexus, rolling regression, robustness, cross-country growth
    JEL: E44 G10 O40
    Date: 2009–09
  3. By: Naude, Wim
    Abstract: One year into the global economic crisis, it has become clear that the paradigm for international development has changed irrevocably. With leadership, moral authority and the capacity of the West in international development diminishing, developing countries. recovery and future growth will critically hinge on their own initiatives, solutions and leadership. This policy brief summarizes the global responses to the crisis over the past year, points to their shortcomings and argues that a new paradigm for recovery in developing countries is emerging
    Keywords: financial crisis, developing countries, development finance, financia
    Date: 2009
  4. By: Didier Sornette; Ryan Woodard
    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 and mutual 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.
    Date: 2009–05
  5. By: Kang Kook Lee; Md. Rabiul Islam
    Abstract: This paper examines the sensitivity of investment to available cash-stock, a measure for internal funds, for 192 listed non-financial firms of Bangladesh from 1992 to 2002. The empirical results show that smaller firms have greater financing constraints to investment than larger firms due to financial market imperfection and unequal access to external finance. We also find that financing constraints of investment by small firms are eased along with financial development. It is likely that financial development encourages efficiency of the financial market in Bangladesh, and hence decreases cash stock sensitivity of investment of small firms. Our finding demonstrates the importance of financial development for economic growth even in a developing country like Bangladesh.
    Keywords: financing constraints, financial development, investment, Bangladesh
    JEL: G31 G32 D92
    Date: 2009–05–02
  6. By: Thomas Barnebeck Andersen (Department of Economics, University of Copenhagen); Jeanet Bentzen (Department of Economics, University of Copenhagen); Carl-Johan Dalgaard (Department of Economics, University of Copenhagen); Pablo Selaya (Department of Economics, University of Copenhagen)
    Abstract: Empirically, a higher frequency of lightning strikes is associated with slower growth in labor productivity across the 48 contiguous US states after 1990; before 1990 there is no correlation between growth and lightning. Other climate variables (e.g., temperature, rainfall and tornadoes) do not conform to this pattern. A viable explanation is that lightning influences IT diffusion. By causing voltage spikes and dips, a higher frequency of ground strikes leads to damaged digital equipment and thus higher IT user costs. Accordingly, the flash density (strikes per square km per year) should adversely affect the speed of IT diffusion. We find that lightning indeed seems to have slowed IT diffusion, conditional on standard controls. Hence, an increasing macroeconomic sensitivity to lightning may be due to the increasing importance of digital technologies for the growth process.
    Keywords: climate; IT diffusion; economic growth
    JEL: O33 O51 Q54
    Date: 2009–09
  7. By: Rao, B. Bhaskara; Vadlamannati, Krishna Chaitanya
    Abstract: In the extended Solow growth model of Mankiw, Romer and Weil (1992) human capital has only permanent level and no growth effects. In the endogenous growth models human capital is a growth improving variable. Human capital may have both a permanent level and a permanent growth effect. We show, with data from India, that both the level and growth effects of human capital can be estimated with an extension to the Solow model.
    Keywords: Solow model; Level and growth effects of human capital and India
    JEL: O10
    Date: 2009–09–24
  8. By: Stelios Michalopoulos; Luc Laeven; Ross Levine
    Abstract: We model technological and financial innovation as reflecting the decisions of profit maximizing agents and explore the implications for economic growth. We start with a Schumpeterian endogenous growth model where entrepreneurs earn monopoly profits by inventing better goods and financiers arise to screen entrepreneurs. A novel feature of the model is that financiers also engage in the costly, risky, and potentially profitable process of innovation: Financiers can invent more effective processes for screening entrepreneurs. Every existing screening process, however, becomes less effective as technology advances. Consequently, technological innovation and, thus, economic growth stop unless financiers continually innovate. Historical observations and empirical evidence are more consistent with this dynamic model of financial innovation and endogenous growth than with existing models of financial development and growth.
    JEL: G0 G3 O1 O31 O4
    Date: 2009–09
  9. By: Chor Foon Tang; Hooi Hooi Lean
    Abstract: This study examines how much of the variance in economic growth can be explained by various categories of domestic and foreign savings in Malaysia. The bounds testing approach to cointegration and the generalised forecast error variance decomposition technique was used to achieve the objective of this study. The cointegration test results demonstrate that the relationship between economic growth and savings in Malaysia are stable and coalescing in the long run. The variance decomposition finding indicates that economic growth in Malaysia is dominated by domestic savings such as private and public savings. However, the effect of foreign savings on economic growth is relatively insignificant.
    Keywords: Cointegration; Disaggregate savings; Growth; Generalised variance decomposition; Malaysia
    JEL: C22 E21
    Date: 2009–03–02
  10. By: Stephen G. Cecchetti; Marion Kohler; Christian Upper
    Abstract: We study the output costs of 40 systemic banking crises since 1980. Most, but not all, crises in our sample coincide with a sharp contraction in output from which it took several years to recover. Our main findings are as follows. First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.
    JEL: E32 E44
    Date: 2009–09
  11. By: Elvira Sapienza
    Abstract: This paper examines the role of FDI in promoting growth in 25 Central and Southern Eastern Europe (CSEE) using a dynamic panel approach that includes lags of involved variables to mitigate the problem of serial correlation. It adopts also a ‘general-to-specific' approach to deal with the problem of the omitted variable and uses different estimation methods to control for heterogeneity and autocorrelation. The main finding is that FDI has a positive and significant impact on economic growth in accordance with theory.
    Keywords: Foreign Direct Investment, economic growth, transition economies.
    JEL: F15 F21 C33 P27
    Date: 2009–07
  12. By: Basu, Kaushik (Cornell University)
    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.
    Date: 2009–08
  13. By: Peter L. Rousseau (Department of Economics, Vanderbilt University); Hakan Yilmazkuday (Department of Economics, Temple University)
    Abstract: A large body of evidence links financial development to economic growth, yet the channels through which inflation affects this relationship and its stability have been less thoroughly explored. We take an econometric and graphical approach to analyzing these channels, and find that higher levels of financial development, combined with low inflation, are related to higher rates of economic growth, especially in developing countries, but that financial development loses much of its explanatory power in the presence of high inflation. In particular, small increases in the price level seem able to wipe out relatively large efficiency gains achieved through financial deepening when the annual rate of inflation lies between 4 and 19 percent, whereas the operation of the finance-growth link is less affected by higher inflation rates. Growth is generally much lower, however, in such high inflation settings where financial development is typically repressed.
    Keywords: Financial development, economic growth, inflation, cross-country analysis
    JEL: E31 E44 O3
    Date: 2009–09
  14. By: Osipian, Ararat
    Abstract: This paper investigates a possible impact of education corruption on economic growth in Russia. It argues that high levels of education corruption may harm total factor productivity in the long run, primarily through lowering the level of human capital and slowing down the pace of its accumulation. Ethical standards learned in the process of training in universities can also affect the standards of practice in different professions. The growing level of productivity is not likely to reduce education corruption in the short run, but can eventually lead to implementation of higher ethical standards in the education sector.
    Keywords: corruption; education; growth; reform; Russia; transition
    JEL: P21 P37 K42
    Date: 2009–09–21
  15. By: Majah-Leah Ravago (Department of Economics, University of Hawaii at Manoa; East-West Center); James Roumasset (Department of Economics, University of Hawaii at Manoa; University of Hawaii Economic Research Organization); (School of Economics, University of the Philippines)
    Abstract: Sustainability science emerged from the felt need to employ appropriate science and technology in the pursuit of sustainable development. Despite its inertia and avowed purpose of being practical and feasible, however, sustainability science has yet to embrace the policy sciences. In pursuit of this objective, we first trace the history of thought of sustainable development, including its definition and operationalization. Sustainable development encompasses sustainable growth and dynamically efficient development patterns. Two promising approaches to sustainable growth are contrasted. Negative sustainability counsels policy makers to offset any decrease in natural capital with at least the same value of net investment in produced capital. This sustainability criterion neither prescribes how and how much to conserve natural capital nor how much to build up human and productive capital. To fill the void, we offer positive sustainability, which maximizes intertemporal welfare while incorporating interlinkages within the total environomy, dynamic efficiency, and intertemporal equity. In addition, sustainable development must include the lessons from traditional development studies, including how optimal patterns of production, consumption, and trade change with standards of living. However, like Tolstoy’s unhappy families, there are many pathways to unsustainable development. We describe two broad causes of unsustainable growth – rent-seeking and preservationism. We also illustrate patterns of unsustainable development by drawing on lessons from the Philippines. While specialization is the engine of growth, fragmentation is the anchor. We show how policy and governance driven by rent-seeking promote economic stagnation. Low economic growth in turn exacerbates population pressure and environmental degradation – the vicious circle of unsustainable development. We give particular attention to how a resource curse can exacerbate policy distortions and rent-seeking and how the same phenomenon can be promulgated by foreign aid, foreign direct investments, remittances and tourism. For sustainable development not to be at odds with policy science, positive sustainability must be combined with projects and policies that promote dynamic comparative advantage and poverty reduction. We emphasize the facilitative role of government and what it can do to transform the vicious circle into a virtuous circle.
    Keywords: Sustainable development and patterns, positive sustainability, specialization, the Philippines
    JEL: Q01 Q33 Q56
    Date: 2009–09–09
  16. By: Claudio Ferraz (Department of Economics PUC-Rio); Frederico Finan (University of California, Berkeley); Diana Belo Moreira (World Bank)
    Abstract: While cross-country analysis suggests that corruption hinders economic growth, we have little evidence on the mechanisms that link corruption to long-run economic development. We provide micro-evidence on the consequences of corruption for the quality of education. We use data from the auditing of Brazil’s local governments to construct objective measures of corruption involving educational block grants transferred from the central government to municipalities. Using variation in the incidence of corruption across municipalities and controlling for students’, schools’ and municipal characteristics, we find that corruption significantly reduces the school performance of primary school students. Students residing in municipalities where corruption in education was detected score 0.35 standard deviations less on standardized tests, and have significantly higher dropout and failure rates. We also provide evidence on the mechanisms that link corruption and mismanagement to learning and school attainment. The results are consistent with corruption directly affecting economic growth through the reduction of human capital accumulation. JEL Codes: D73, I21, H72
    Date: 2009–09
  17. By: Sadraoui Tarek (LORIA); Naceur Ben Zina
    Abstract: This paper investigates the relationship between private and public investment in R&D, while taking into account the effect of several instruments policies such as subsidies and taxes. We design a new look of knowledge spillovers and R&D cooperation to explain the contribution of public and private R&D on growth. We propose a heterogeneous dynamic panel data model to consider the endogenous effect of R&D investment. We also distinguish between the estimated long and short run results. Our results based on a sample of 23 countries over the period 1992-2004 indicate that both public and private investments in R&D are complementary. By establishing an endogenous growth model, the estimates indicate that public and private R&D depends on the host country's human capital investment. Results indicate that foreign direct investment is a more significant spillover channel than imports.
    Date: 2009–05
  18. By: Andros Kourtellos; Thanasis Strengos; Chih Ming Tan
    Abstract: We uncover evidence of substantial heterogeneity in the growth experience of countries using a structural threshold regression methodology. Our findings suggest that studies that seek to promote mono-causal explanations in the institutions versus geography debate in growth are potentially misleading.
    Keywords: Threshold Regression, Endogenous Threshold Variables, Growth, Institutions, Geography
    JEL: C21 C51 O47 O43
    Date: 2009
  19. By: Erhan Bayraktar; Hao Xing
    Abstract: Given that the terminal condition is of at most linear growth, it is well known that a Cauchy problem admits a unique classical solution when the coefficient multiplying the second derivative (i.e., the volatility) is also a function of at most linear growth. In this note, we give a condition on the volatility that is necessary and sufficient for a Cauchy problem to admit a unique solution.
    Date: 2009–08
  20. By: Amavilah, Voxi Heinrich
    Abstract: There is sufficient microeconomic evidence that holidays are important to economic life. Is there similar support at the macroeconomic level? This exploratory paper uses a simple approach to assess the impacts of holidays on the economic growth rates of 182 nations in 2002. It finds that the human development level has a larger effect on economic growth rate than holidays. At the aggregate level holidays affect economic growth positively, but in a statistically insignificant way. For example, increasing by one day the number of holidays per year adds 0.30% to annual growth rate. Unlike non-religious holidays, religious holidays, whether Christian or non-Christian, affect economic growth negatively. The results are meaningful, yet statistically weak insofar as their explanatory power is only around 20%. They suggest that instruments for holidays, such as total sales revenue during holidays ,or something, other than the number of holidays, may be better explanatory variables. One can think of any number of fixes like remodeling the problem, choosing alternative estimators and/or functional forms. For now, those fixes belong to future efforts.
    Keywords: Holidays; economic growth; Madonna; human development index (HDI)
    JEL: C51 O47 E13 C21 D60
    Date: 2009–09–12
  21. By: Elisaveta Archanskaïa (Observatoire Français des Conjonctures Économiques); Jerome Creel (Observatoire Français des Conjonctures Économiques); Paul Hubert (Observatoire Français des Conjonctures Économiques)
    Abstract: This article studies the impact of oil shocks on the macroeconomy in two ways insofar unexploited in the literature. The analysis is conducted at the global level, and it explicitly accounts for the potentially changing nature of oil shocks. Based on an original world GDP series and a grouping of oil shocks according to their nature, we find that oil supply shocks negatively impact world growth, contrary to oil demand shocks, procyclical in their nature. This result is robust at the national level for the US. Furthermore, endogenous monetary policy is shown to have no countercyclical effects in the context of an oil demand shock.
    Keywords: Oil shocks, Oil demand shocks, Oil supply shocks, Causality
    JEL: E32 Q43
    Date: 2009
  22. By: Cristiana Benedetti Fasil
    Abstract: Recent empirical evidence based on firm level data emphasizes firm heterogeneity in innovation activities and the different effects of process and product innovations on the productivity level and productivity growth. To match this evidence, this paper develops an endogenous growth model with two sources of firm heterogeneity: production efficiency and product quality.Both attributes evolve endogenously through firms’ innovation choices. Growth is driven by innovation and self-selection of firms and sustained by entrants who imitate incumbents. Calibrating the economy to match the Spanish manufacturing sector, the model enables to quantify the different effects of selection, innovation, and imitation as well as product and process innovation on growth. Compared to single attribute models of firm heterogeneity, the model provides a more complete characterization of firms’ innovation choices explaining the partition of firms along different innovation strategies and generating consistent firm size distributions.
    Keywords: endogenous growth theory, firm dynamics, heterogeneous firms, productivity, quality, innovation
    JEL: L11 L16 O14 O31 O40
    Date: 2009
  23. By: Christopher J. Waller
    Abstract: I use the monetary version of the neoclassical growth model developed by Aruoba, Waller and Wright (2008) to study the properties of the model when there is exogenous growth. I first consider the planner's problem, then the equilibrium outcome in a monetary economy. I do so by first using proportional bargaining to determine the terms of trade and then consider competitive price taking. I obtain closed form solutions for the balanced growth path of all variables in all cases. I then derive closed form solutions for the transition paths under the assumption of full depreciation and, in the monetary economy, a non-stationary interest rate policy.
    Keywords: Monetary policy ; Econometric models
    Date: 2009

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