nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒10‒03
fifteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Remittances and Financial Development:;Substitutes or Complements in Economic Growth? By Giulia Bettin; Alberto Zazzaro
  2. Endowment structures, industrial dynamics, and economic growth By Ju, Jiandong; Lin, Justin Yifu; Wang, Yong
  3. Growth miracles and failures in a Markov switching classification model of growth By Kerekes, Monika
  4. Can Second-Generation Endogenous Growth Models Explain The Productivity Trends and Knowledge Production In the Asian Miracle Economies? By Ang, James; Madsen, Jakob
  5. Ambitious entrepreneurship, high-growth firms and macroeconomic growth By André van Stel; Roy Thurik; Erik Stam; Chantal Hartog
  6. Hierarchical Growth: Basic and Applied Research By Hans Gersbach; Gerhard Sorger; Christian Amon
  8. Inflation and growth: new evidence from a dynamic panel threshold analysis By Kremer, Stephanie; Bick, Alexander; Nautz, Dieter
  9. New Keynesian versus Old Keynesian Government Spending Multipliers. By John F. Cogan; Tobias Cwik; John B. Taylor; Volker Wieland
  10. Trade and Economic Growth: Historical Evidence By Schularick, M.; Solomou, S.
  11. Growth-optimal investments and numeraire portfolios under transaction costs: An analysis based on the von Neumann-Gale model By Wael Bahsoun; Igor V. Evstigneev; Michael I. Taksar
  12. Liquidity, innovation and growth By Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
  13. ENVIRONMENTAL PROTECTION AND ECONOMIC GROWTH By Kuhl Teles, Vladimir; A. Arraes, Ronaldo
  14. Growth and the pollution convergence hypothesis: A nonparametric approach By Ordás Criado, Carlos; Valente, Simone; Stengos, Thanasis
  15. Saving and growth under borrowing constraints explaining the "high saving rate" puzzle By Yi Wen

  1. By: Giulia Bettin (Hamburg Institute of International Economics (HWWI), Germany); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: In a recent study, Chami et al. (2003) suggested that remittances can have a negative impact on;economic growth of the receiving country by diminishing the work effort of the migrants' relatives.;Subsequently, Giuliano and Ruiz-Arranz (2009) found that this moral hazard effect emerges only;when financial development is low. In this paper, we introduce a new indicator of financial;development measuring the efficiency domestic banking system and show that the impact of;remittances on economic growth is negative (positive) in countries where bank efficiency is low;(high). This complementarity result is robust to controls for other financial development and;institutional quality indicators.
    Keywords: bank efficiency, economic growth, financial development, migrants' remittances
    JEL: F22 F43 O16
    Date: 2009–09
  2. By: Ju, Jiandong; Lin, Justin Yifu; Wang, Yong
    Keywords: Economic Theory&Research,Political Economy,Economic Growth,Access to Finance,Currencies and Exchange Rates
    Date: 2009–09–01
  3. By: Kerekes, Monika
    Abstract: Acknowledging the fact that the growth experience of countries is seldom well described by the average growth rate, this paper aims at identifying countries that are similar in terms of their growth process, thus emphasizing the dynamics of growth rates. To that end, the growth experience of countries is interpreted as a Markov switching process with countries switching between four distinct growth regimes: crisis, stagnation, stable growth, and miracle growth. In the model, different growth patterns arise because countries switch between the growth regimes with different frequencies. In order to account for the distinct dynamics, the traditional Markov switching model is extended by a classification mechanism that endogenously assigns countries exhibiting similar dynamics into the same, and countries exhibiting distinct dynamics into different clusters. Three distinct growth clusters are obtained: the first cluster consists of countries that have achieved relatively fast and steady growth mainly by spending time in the stable and the miracle growth regime. Countries in the second cluster have achieved only moderate growth and often found themselves in stagnation for longer periods. The third cluster might be referred as a growth failure cluster because the countries associated with this cluster have suffered from small growth rates and frequent crises. It appears that developing countries can avoid falling into the growth failure cluster by securing a minimum amount of human capital. In contrast to that, the most distinguishing feature of the countries in the successful growth cluster is their reasonable quality of institutions.
    Keywords: Economic Growth,Regime Switching,Latent Class Models
    JEL: O11 O57 C23
    Date: 2009
  4. By: Ang, James; Madsen, Jakob
    Abstract: Using data for six Asian miracle economies over the period from 1953 to 2006, this paper examines the extent to which growth has been driven by R&D and tests which second-generation endogenous growth model is most consistent with the data. The results give strong support to Schumpeterian growth theory but only limited support to semi-endogenous growth theory. Furthermore, it is shown that R&D has played a key role for growth in the Asian miracle economies.
    Keywords: Schumpeterian growth; semi-endogenous growth; Asian growth miracle
    JEL: O30 O40
    Date: 2009
  5. By: André van Stel; Roy Thurik; Erik Stam; Chantal Hartog
    Abstract: We estimate the impact of ambitious entrepreneurship (entrepreneurs expecting to grow their firm) and high-growth firms (firms that have actually realized high growth rates) on subsequent macroeconomic growth for a sample of countries participating in the Global Entrepreneurship Monitor between 2002-2005. We find that ambitious entrepreneurship has a positive impact on macroeconomic growth. This effect is stronger than that of entrepreneurship in general. Surprisingly, this effect of ambitious entrepreneurship is stronger in low-income countries than in high-income countries. Established high-growth firms do not seem to drive macroeconomic growth.  
    Date: 2009–09–25
  6. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Gerhard Sorger (Department of Economics, University of Vienna, Austria); Christian Amon (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We develop a model that incorporates salient features of growth in modern economies. We combine the expanding-variety growth model through horizontal innovations with a hierarchy of basic and applied research. The former extends the knowledge base, while the latter commercializes it. Two-way spillovers reinforce the productivity of research in each sector. We establish the existence of balanced growth paths. Along such paths the stock of ideas and the stock of commercialized blueprints for intermediate goods grow with the same rate. Basic research is a necessary and sufficient condition for economic growth. We show that there can be two different facets of growth in the economy. First, growth may be entirely shaped by investments in basic research if applied research operates at the knowledge frontier. Second, long-run growth may be shaped by both basic and applied research and growth can be further stimulated by research subsidies. We illustrate different types of growth processes by examples and polar cases when only upward or downward spillovers between basic and applied research are present.
    Keywords: Basic research, applied research, knowledge base, commercialization, hierarchical economic growth
    JEL: H41 O31 O41
    Date: 2009–07
  7. By: Pereira, Carlos; Kuhl Teles, Vladimir
    Abstract: This manuscript empirically assesses the effects of political institutions on economic growth. It analyzes how political institutions affect economic growth in different stages of democratization and economic development by means of dynamic panel estimation with interaction terms. The new empirical results obtained show that political institutions work as a substitute for democracy promoting economic growth. In other words, political institutions are important for increasing economic growth, mainly when democracy is not consolidated. Moreover, political institutions are extremely relevant to economic outcomes in periods of transition to democracy and in poor countries with high ethnical fractionalization.
    Date: 2009–09–03
  8. By: Kremer, Stephanie; Bick, Alexander; Nautz, Dieter
    Abstract: We introduce a dynamic panel threshold model to shed new light on the impact of inflation on long-term economic growth. The empirical analysis is based on a large panel-data set including 124 countries during the period from 1950 to 2004. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation hampers growth if it exceeds 17%. Below this threshold, however, the impact of inflation on growth remains insignificant. Therefore, our results do not support growth-enhancing effects of inflation in developing countries.
    Keywords: Inflation Thresholds,Inflation and Growth,Dynamic Panel Threshold Model
    JEL: E31 C23 O40
    Date: 2009
  9. By: John F. Cogan (Stanford University - The Hoover Institution on War, Revolution and Peace, HHMB Rm 347, Stanford, CA 94305, USA.); Tobias Cwik (Goethe University Frankfurt, Grüneburgplatz 1, Uni-Pf. 77, D-60323 Frankfurt am Main, Germany.); John B. Taylor (Stanford University, Stanford, CA 94305, USA.); Volker Wieland (University of Frankfurt, P.O. Box 94, Mertonstrasse 17, D-60054 Frankfurt am Main, Germany.)
    Abstract: Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large. JEL Classification: C52, E62.
    Keywords: Fiscal Multiplier, New Keynesian Model, Fiscal Stimulus, Government Spending, Macroeconomic Modeling.
    Date: 2009–09
  10. By: Schularick, M.; Solomou, S.
    Abstract: Is free trade good for growth? Some of the most disturbing evidence to the contrary comes from a period that is often described as the first era of globalization. Studies of the period 1870-1914 have emphasised that protectionist tariff policy was associated with higher rates of economic growth. In this paper we reassess the empirical evidence about the relationship between tariffs and growth in this era. Our key findings challenge the idea of the 19th century tariff-growth paradox. High tariffs did not stimulate economic growth. But there is equally little evidence that trade and other external factors were key determinants of economic growth. The paradox of this era of globalization is not that free trade was bad for growth; it is that the international environment seems to have mattered little to countries' growth trajectories.
    Keywords: economic growth; international trade; economic history; growth econometrics; globalization
    JEL: F10 F13 N10 O11
    Date: 2009–09–24
  11. By: Wael Bahsoun; Igor V. Evstigneev; Michael I. Taksar
    Abstract: The aim of this work is to extend the capital growth theory developed by Kelly, Breiman, Cover and others to asset market models with transaction costs. We define a natural generalization of the notion of a numeraire portfolio proposed by Long and show how such portfolios can be used for constructing growth-optimal investment strategies. The analysis is based on the classical von Neumann-Gale model of economic dynamics, a stochastic version of which we use as a framework for the modelling of financial markets with frictions.
    Date: 2009–09
  12. By: Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
    Abstract: Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation and financial development. A novel feature of the model is that the market for innovation goods is decentralized. Financial intermediaries arise endogenously to provide liquid funds to the innovation sector. We calibrate the model to address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflation on welfare and growth. Consistent with the data but in contrast to previous work, reducing inflation generates large gains in the growth rate of per capita income as well as in welfare. Relative to reducing inflation, improving the efficiency of the financial market increases growth and welfare by much smaller amounts.
    Keywords: Money, Credit, Innovation, Growth
    Date: 2009–09
  13. By: Kuhl Teles, Vladimir; A. Arraes, Ronaldo
    Abstract: This paper explores the link between environmental policy and economic growth by employing an extension of the AK Growth Model. We include a state equation for renewable natural resources. We assume that the change in environmental regulations induces costs and that economic agents also derive some utility from capital stock accumulation vis-`a-vis the environment. Using the Hopf bifurcation theorem, we show that cyclical environmental policy strategies are optimal, providing theoretical support for the Environmental Kuznets Curve.
    Date: 2009–08–24
  14. By: Ordás Criado, Carlos; Valente, Simone; Stengos, Thanasis
    Abstract: The pollution-convergence hypothesis is formalized in a neoclassical growth model with optimal emissions reduction: pollution growth rates are positively correlated with output growth (scale effect) but negatively correlated with emission levels (defensive effect). This dynamic law is empirically tested for two major and regulated air pollutants - nitrogen oxides (NOX) and sulfur oxides (SOX) - with a panel of 25 European countries spanning over years 1980-2005. Traditional parametric models are rejected by the data. However, more flexible regression techniques - semiparametric additive specifications and fully nonparametric regressions with discrete and continuous factors - confirm the existence of the predicted positive and defensive effects. By analyzing the spatial distributions of per capita emissions, we also show that cross-country pollution gaps have decreased over the period for both pollutants and within the Eastern as well as the Western European areas. A Markov modeling approach predicts further cross-country absolute convergence, in particular for SOX. The latter results hold in the presence of spatial non-convergence in per capita income levels within both regions.
    Keywords: Air pollution; convergence; economic growth; mixed nonparametric regressions; distribution dynamics.
    JEL: C14 C23 Q53
    Date: 2009–09–17
  15. By: Yi Wen
    Abstract: Fast-growing economies tend to have extremely high saving rates. Empirical evidence suggests that this positive correlation holds largely because high growth leads to high saving, not the other way around. Such empirical evidence is inconsistent with the permanent-income hypothesis, but consistent with standard neoclassical growth theory, since high productivity growth raises the rate of returns to investment, hence stimulating saving through high real interest rates. However, fast-growing economies have not just high saving rates, but also low interest rates. Why would households save excessively to finance firms? investment when the interest rate on their savings is so low? This paper shows that precautionary saving under borrowing constraints can solve the puzzle. Borrowing constraints make an individual?s marginal propensity to consume negatively dependent on her permanent income, so that high growth can lead to substantially increased saving without high interest rates. In other words, precautionary saving is able to support a large spread between the deposit rate and the rate of returns to capital; consequently, fast-growing economies can exhibit not only astonishingly high saving rates despite low deposit rates, but also undiminished rates of return to capital despite large investment-to-output ratios.
    Keywords: Saving and investment ; Consumer behavior
    Date: 2009

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