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

  1. Do Workers' Remittances Promote Economic Growth? By Michael T. Gapen; Adolfo Barajas; Ralph Chami; Peter Montiel; Connel Fullenkamp
  2. Development Aid and Economic Growth: A Positive Long-Run Relation By Camelia Minoiu; Sanjay Reddy
  3. Regional Economic Growth and Human Capital: The Role of Overeducation By Ramos, Raul; Surinach, Jordi; Artís, Manuel
  4. Liquidity, Innovation and Growth By Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
  5. Modeling with Macro-Financial Linkages: Credit and Policy Shocks in Emerging Markets By Inci Ötker; Jaromir Benes; David Vávra
  6. UK Macroeconomic Forecasting with Many Predictors: Which Models Forecast Best and When Do They Do So? By Gary Koop; Dimitris Korobilis
  7. Re-Orient? MNC Penetration and Contemporary Shifts in the Global Political Economy By Tausch, Arno; Heshmati, Almas
  8. China?s challenges to future sustainable economic growth and the implications for the United States By Degen, Ronald
  9. A Multi-industry Model of Growth with Financing Constraints By Anna Ilyina; Roberto M. Samaniego
  10. The Gambia: Demand for Broad Money and Implications for Monetary Policy Conduct By Subramanian S. Sriram
  11. Spillovers from the Rest of the World into Sub-Saharan African Countries By Gustavo Ramirez; Paulo Flavio Nacif Drummond
  12. Deteriorating Public Finances and Rising Government Debt: Implications for Monetary Policy By Lillian Cheung; Chi-Sang Tam; Jessica Szeto
  13. International Evidence on Recovery from Recessions By Ugo Panizza; Valerie Cerra; Sweta Chaman Saxena
  14. Technical Change and Total Factor Productivity Growth for Swedish Manufacturing and Service Industries By Oh, Donghyun; Heshmati, Almas; Lööf, Hans
  15. The Transmission of Financial Stress from Advanced to Emerging Economies By Irina Tytell; Selim Elekdag; Ravi Balakrishnan; Stephan Danninger
  16. Competitiveness in Central-Europe: What Has Happened Since EU Accession? By Céline Allard

  1. By: Michael T. Gapen; Adolfo Barajas; Ralph Chami; Peter Montiel; Connel Fullenkamp
    Abstract: Over the past decades, workers' remittances have grown to become one of the largest sources of financial flows to developing countries, often dwarfing other widely-studied sources such as private capital and official aid flows. While it is undeniable that remittances have poverty-alleviating and consumption-smoothing effects on recipient households, a key empirical question is whether they also serve to promote long-run economic growth. This study tackles this question and addresses the main shortcomings of previous empirical work, focusing on the appropriate measurement, and incorporating an instrument that is both correlated with remittances and would only be expected to affect growth through its effect on remittances. The results show that, at best, workers' remittances have no impact on economic growth.
    Keywords: Capital accumulation , Capital flows , Developing countries , Economic growth , Foreign labor , Labor markets , Migration , Poverty reduction , Private capital flows , Transfers of foreigners income , Welfare , Workers remittances ,
    Date: 2009–07–20
  2. By: Camelia Minoiu; Sanjay Reddy
    Abstract: We analyze the growth impact of official development assistance to developing countries. Our approach is different from that of previous studies in two major ways. First, we disentangle the effects of two kinds of aid: developmental and non-developmental. Second, our specifications allow for the effect of aid on economic growth to occur over long periods. Our results indicate that developmental aid promotes long-run growth. The effect is significant, large and robust to different specifications and estimation techniques.
    Keywords: Cross country analysis , Developing countries , Development assistance , Economic growth , Economic models , Resource mobilization ,
    Date: 2009–06–01
  3. By: Ramos, Raul (University of Barcelona); Surinach, Jordi (University of Barcelona); Artís, Manuel (University of Barcelona)
    Abstract: The paper analyses the link between human capital and regional economic growth in the European Union. Using various indicators of human capital calculated from census microdata, we conclude that the recent economic performance of European regions is associated with an increase in overeducation. In fact, measures of educational mismatch seem to be more strongly connected to regional economic performance than do other traditional measures of human capital stock.
    Keywords: regional economic growth, human capital, educational mismatch, overeducation
    JEL: O18 O47 R23
    Date: 2009–09
  4. 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; Growth; Innovation; Financial intermediation
    JEL: O4 E1 G00
    Date: 2009–09–24
  5. By: Inci Ötker; Jaromir Benes; David Vávra
    Abstract: This paper develops a stylized, small, open economy macro model that incorporates an explicit and non-trivial role for financial intermediation. It illustrates how such a model could be used for policy analysis in an emerging market economy where policymakers are concerned about risks associated with rapid credit growth, financial dollarization, and foreign borrowing, while lacking traditional tools to effect monetary policy transmission, and hence could resort to more direct instruments, such as foreign exchange market intervention and regulatory and administrative measures. Calibrating the model to a stylized emerging European economy, the paper simulates real and financial sector implications of various external and policy-related shocks that could be used as input for monetary policy making.
    Keywords: Banks , Central banks , Credit controls , Credit expansion , Credit risk , Dollarization , Economic models , Emerging markets , External borrowing , External shocks , Financial intermediation , Financial sector , Loans , Monetary policy ,
    Date: 2009–06–08
  6. By: Gary Koop (Department of Economics, University of Strathclyde); Dimitris Korobilis (Department of Economics, University of Strathclyde)
    Abstract: Block factor methods offer an attractive approach to forecasting with many predictors. These extract the information in these predictors into factors reflecting different blocks of variables (e.g. a price block, a housing block, a financial block, etc.). However, a forecasting model which simply includes all blocks as predictors risks being over-parameterized. Thus, it is desirable to use a methodology which allows for different parsimonious forecasting models to hold at different points in time. In this paper, we use dynamic model averaging and dynamic model selection to achieve this goal. These methods automatically alter the weights attached to different forecasting models as evidence comes in about which has forecast well in the recent past. In an empirical study involving forecasting output growth and inflation using 139 UK monthly time series variables, we find that the set of predictors changes substantially over time. Furthermore, our results show that dynamic model averaging and model selection can greatly improve forecast performance relative to traditional forecasting methods.
    Keywords: Bayesian, state space model, factor model, dynamic model averaging
    JEL: E31 E37 C11 C53
    Date: 2009–08
  7. By: Tausch, Arno (University of Innsbruck); Heshmati, Almas (Seoul National University)
    Abstract: This article analyses IMF estimates of economic growth in 180 countries (IMF, 2009), and inks the results to the "Re-orient" approach, put forward by Frank, 1998. With global economic gravitation shifting to the Indian Ocean/Pacific region, the article also analyses the role of MNC (foreign capital) penetration as the key variable of past quantitative dependency studies for contemporary economic growth and social performance. In a Schumpeterian fashion, MNC penetration reflects the power, which transnational oligopolies wield over local economies. Today, social polarization and stagnation increase as a consequence of the development model, based on high MNC penetration.
    Keywords: international relations and international political economy, economic development, technological change, growth
    JEL: F50 O10
    Date: 2009–09
  8. By: Degen, Ronald (International School of Management Paris)
    Abstract: The ?stunning comeback? of China after almost two centuries is one of the most significant trends affecting Western economies, particularly the United States (US). None of the key drives that have promoted China?s growth are really at risk if the Chinese government does not deviate from its present economic policy and keeps up gradual refinement of its unique and effective social-capitalist model. The real risks to China?s future growth are remaining poverty, the unbalanced and unsustainable growth model, bureaucracy, and the corruption of government officials. China?s government is taking determined steps to solve these challenges. The great challenge for the US is its large accumulated debt with China, and the need for additional borrowing to finance its massive economic stimulus plan. There is little doubt that US will (after solving the financial crisis of 2008 with China?s help) continue to be one of the most powerful nations in the world. Nevertheless, it will have to learn to share the world leadership with other countries, particularly with China, Europe and other fast growing developing countries. Gone is the absolute dominance of the US (in terms of ideas and money), and its use of the International Monetary Fund and World Bank as vehicles to spread its influence and market economy model over the developing world.
    Keywords: China?s economic transformation, China?s social-capitalism, China?s challenges to economic growth, China?s remaining poverty, China?s corruption, China?s unsustainable growth model, US accumulated debt, inflation and devaluation of the dollar
    JEL: M0 M1
    Date: 2009–09–27
  9. By: Anna Ilyina; Roberto M. Samaniego
    Abstract: This paper develops a multi-industry growth model in which firms require external funds to conduct productivity-enhancing R&D. The cost of research is industry-specific. The tightness of financing constraints depends on the level of financial development and on industry characteristics. Over time, a financially constrained economy may converge to the growth path of a frictionless economy, so long as an industry with the fastest expanding technological frontier does not permanently fall behind due to low R&D. The model’s industry dynamics map into a differences-in-differences regression, in which industry growth depends on the interaction between financial development and industry level R&D intensity.
    Keywords: Economic growth , Economic models , External financing , External sector , Industrial sector , Production , Productivity ,
    Date: 2009–06–01
  10. By: Subramanian S. Sriram
    Abstract: This paper evaluates the demand for broad money (M2) in The Gambia for January 1988-June 2007. There appears to be a long-run relationship for demand for real M2, but the relationship is not stable. Exogenous output shocks, financial innovation, changes in income velocity, and inadequate data quality contribute to the instability. The authorities may need to apply the monetary targeting regime flexibly in the overall objective of preserving price stability. A possible option for The Gambia is to become an inflation targeter lite.
    Keywords: Central bank policy , Commercial banks , Demand for money , Economic growth , Economic models , Financial sector , Gambia, The , Inflation targeting , Interest rates on deposits , Liquidity , Monetary policy , Price stabilization , Sub-Saharan Africa , Time series ,
    Date: 2009–09–10
  11. By: Gustavo Ramirez; Paulo Flavio Nacif Drummond
    Abstract: This paper investigates the impact of a global slowdown on individual African countries using a series of dynamic panel regressions for countries in the region, relating real growth in domestic output to world growth in trade weighted by partner countries and several control variables: oil prices, non-oil prices, financial variables, and country fixed effects. Estimates are then applied to prepare country-specific simulations. The model, which is shown to estimate well out-of-sample spillover effects in the region, shows that countries in the region are significantly affected by lower external demand for their exports, declines in commodity prices and the terms of trade, and tighter financial conditions abroad. The last, proxied by the spread of three-month Libor to US treasury bills, is to our knowledge one of the first applications of such a measure of financial conditions for countries in the region.
    Keywords: Commodity price fluctuations , Commodity prices , Cross country analysis , Demand , Economic growth , Economic models , Exports , External shocks , Oil prices , Spillovers , Sub-Saharan Africa , Terms of trade ,
    Date: 2009–07–22
  12. By: Lillian Cheung (Research Department, Hong Kong Monetary Authority); Chi-Sang Tam (Research Department, Hong Kong Monetary Authority); Jessica Szeto (Research Department, Hong Kong Monetary Authority)
    Abstract: The sharp rise in government debt in many major economies following the introduction of large fiscal stimulus measures during the global financial crisis of 2008-09 has triggered concerns over its impact on long-term interest rates and the potential negative consequences for future growth and inflation. This paper uses an error-correction model to assess the effect of growing government debt on long-term real interest rates by drawing on empirical evidence from the US. The results show that in the long run, a one-percentage-point increase in the federal debt-to-GDP ratio raises the equilibrium 10-year real US Treasury yield by about six basis points. We also discuss the economic consequences of a rise in the world long-term interest rates, and draw implications for longer-term growth and the conduct of monetary policy in the Asian economies.
    Keywords: Public debt, fiscal policy, monetary policy, long term interest rate, real interest rate, error-correction model
    JEL: E43 E47 E52 E62 H63
    Date: 2009–08
  13. By: Ugo Panizza; Valerie Cerra; Sweta Chaman Saxena
    Abstract: Although negative shocks have persistent effects on output on average, this paper shows that macroeconomic policies and the structure of the economy can influence the speed of recovery and mitigate the persistence of the shock. Indeed, monetary and fiscal stimulus and foreign aid can spur a rebound, with impacts that are asymmetrically stronger than in nonrecovery years. Real depreciation and the exchange rate regime also have asymmetric growth effects in a recovery year relative to other years of expansion. Recoveries are more sluggish in open economies, partly because fiscal policy is less effective than in closed economies.
    Keywords: Banking crisis , Business cycles , Concessional aid , Developed countries , Economic growth , Economic recession , Economic recovery , Emerging markets , Exchange rate regimes , External shocks , Fiscal policy , Monetary policy , Real effective exchange rates , Trade policy ,
    Date: 2009–08–05
  14. By: Oh, Donghyun (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Heshmati, Almas (Seoul National University, Seoul, Korea); Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper presents alternative specifications of the production functions of a large panel of Swedish firms for the period 1992-2000. The period can be characterized as a transition when long-run productivity growth in the Swedish economy improved from being among the weakest to one of the strongest within the OECD. In order to present a detailed exploration of this dramatic change, the time trend and general index models are applied to estimate total factor productivity (TFP) growth, rate of technical change and returns to scale. The models are extended to allow for firm-specific as well as time-varying technical change. The parametric TFP measures are also compared with the non-parametric Solow residual, and several hypotheses are tested to explain the growth patterns in the Swedish economy. It is found that the improved growth rate, initially starting in large exporting manufacturing firms, after a deep economic crisis at the beginning of the 1990s, spilled over to the rest of the economy, both manufacturing and services.
    Keywords: Technical change; total factor productivity growth; manufacturing; service; enterprise panel data
    JEL: C23 C52 C67 D24 L25 L60 L80 O30
    Date: 2009–09–28
  15. By: Irina Tytell; Selim Elekdag; Ravi Balakrishnan; Stephan Danninger
    Abstract: This paper studies how financial stress is transmitted from advanced to emerging economies, using a new financial stress index for emerging economies. An episode of financial stress is defined as a period when the financial system's ability to intermediate may be impaired. Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies. In line with this pattern, the unprecedented spike in financial stress in advanced economies elevated financial stress across emerging economies above levels seen during the Asian crisis, but with significant cross-country variation. The extent of pass-through of financial stress is related to the depth of financial linkages between advanced and emerging economies. The paper finds that higher current account and fiscal balances do little to insulate emerging economies from the transmission of financial stress in advanced economies. However, they may help dampen the impact on the real sector of emerging economies and help reestablish financial stability and foreign capital inflows once financial stress subsides.
    Keywords: Banking crisis , Banking sector , Capital flows , Developed countries , Developing countries , Economic models , Emerging markets , Financial crisis , Financial risk , Spillovers , Transition economies ,
    Date: 2009–06–26
  16. By: Céline Allard
    Abstract: Since EU accession, trade flows have exhibited strong dynamics in Central-Eastern Europe (CEE). During the period leading to the current global turmoil, the region has also experienced continuous exchange rate appreciation and rapid FDI inflows, both likely to have affected these countries' competitiveness. This paper describes how the determinants of exports and imports have evolved in CEE countries over 2002-07 and econometrically derives their contribution to trade, with a view to assessing competitiveness developments. The analysis reveals that the global and domestic upswings, along with rising trade market shares, go a long way toward accounting for trade developments in CEE countries until 2007, pointing to continuous nonprice competitiveness gains. It also finds that exchange rate appreciation did not unduly weigh on export and import growth, suggesting that most of it reflected an upward movement in its equilibrium value. While the region entered the current period of global slowdown from a strong competitiveness position, the crisis also exposed the vulnerability of its heavy reliance on global demand to a trade shock.
    Keywords: Central and Eastern Europe , Cross country analysis , Economic models , European Union , Exchange rate appreciation , Exports , Foreign direct investment , Global competitiveness , Imports , Trade ,
    Date: 2009–06–02

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