nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒10‒17
fifteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Entrepreneurship and Growth: Evidence from China By Hongbin Li; Zheyu Yang; Xianguo Yao; Junsen Zhang
  2. Financial Development, Shocks, and Growth Volatility By Mallick, Debdulal
  3. Public Debt and Economic Growth: a Granger Causality Panel Data Approach By António Afonso; Sebastian Hauptmeier
  4. Education and Economic Growth in Slovenia: A Dynamic General Equilibrium Approach with Endogenous Growth By Verbic, Miroslav; Majcen, Boris; Cok, Mitja
  5. Multiple Testing Techniques in Growth Econometrics By Deckers, Thomas; Hanck, Christoph
  6. Stochastic Growth in the United States and Euro Area By Peter N. Ireland
  7. Environmental policy, education and growth: A reappraisal when lifetime is finite By Xavier Pautrel
  8. Inequality may retard growth but sometimes progressive redistribution makes it worse By DEBASIS BANDYOPADHYAY; XUELI TANG
  9. Productivity Growth and the Future of the U.S. Saving Rate By Talan Iscan
  10. Technology, convergence and business cycles. By Galo Nuño
  11. R&D and Economic Growth in Slovenia: A Dynamic General Equilibrium Approach with Endogenous Growth By Verbic, Miroslav; Majcen, Boris; Cok, Mitja
  12. "The Steam Engine and U.S. Urban Growth During the Late Nineteenth Century" By Burton A. Abrams; Jing Li; James G. Mulligan
  13. Assessing the Impact of Fiscal Policy on Poverty By Andrew McKay
  14. Over-exploitation of open-access natural resources and global indeterminacy in an economic growth model By Angelo Antocii; Marcello Galeotti; Paolo Russu
  15. Measuring the Performance of Islamic Banks by Adapting Conventional Ratios By Ahmed Mohamed Badreldin

  1. By: Hongbin Li; Zheyu Yang; Xianguo Yao; Junsen Zhang
    Abstract: This paper examines the impact of entrepreneurship on economic growth by using a panel data set of 29 provinces in China over 20 years. Two indicators of entrepreneurship are defined and introduced into the traditional growth regression framework that is estimated using the system generalized method of moments. We also use the ratio of staff and workers of state-owned enterprises and per capita sown land area as the instrumental variables to identify the causal effect of entrepreneurship on economic growth. Our results suggest that entrepreneurship has a significant positive effect on economic growth and this finding is robust even after we control for other demographic and institutional variables. Our study provides some evidence that may be used as a basis for evaluating the effect of China’s policy on private business which has been increasingly relaxed since the late 1970s.
    JEL: L26 O53 O53
    Date: 2009–10
  2. By: Mallick, Debdulal
    Abstract: This paper argues that studying the effect of financial development and shocks on aggregate growth volatility will not be informative because they affect growth volatility through its different components. Volatility declines either a consequence of a change in the nature of shocks or a change in how the economy reacts to shocks. If two economies differ only in terms of volatility of shocks experienced, the GDP growth spectrum of one economy will lie proportionately below that of another at all frequency ranges so that both business cycle and long-run variances will be lower. Conversely, if change in volatility is due to propagation mechanism such as financial development, a country having developed financial markets will have disproportionately lower variance at the business cycle than at other frequencies relative to that of a country having less developed financial markets. Therefore, the variance at only the business cycle frequency range will be influenced by financial development. The novelty of this paper is that different components of growth volatility are extracted using spectral method. Empirical evidence provides qualified support for both hypotheses. Higher private credit, which is used as proxy of financial development, dampens business cycle volatility but not the long-run volatility. Shocks, as measured by changes in the terms of trade, affect both business cycle and long-run volatility negatively. These results are robust to alternative market-based measure of financial development, and corrections for reverse causality. These results have important implications for growth theory as they shed lights on the factors causing permanent and transitory deviations from the steady state.
    Keywords: Financial development; growth volatility; business cycle; spectral analysis
    JEL: E32 O16 C22 E44 O50 C21
    Date: 2009–10
  3. By: António Afonso; Sebastian Hauptmeier
    Abstract: This paper analyses the Granger-causality relationship between the growth of the real GDP per capita and the public debt, here represented by the ratio of the current primary surplus/GDP and the ratio of the gross Government debt/GDP. Using OECD annual data for 20 countries between 1988 and 2001, we adapt the methodology recently applied by Erdil and Yetkiner (2008) and we conclude that there is clear Granger causality and that it is always bi-directional. In addition, our findings point to a heterogeneous behaviour across the different countries. These results have important policy implications since not only does public debt restrain economic growth, but also real GDP per capita growth influences the evolution of public debt.
    Keywords: panel data; public debt and economic growth
    JEL: C23 C12 H6
    Date: 2009–04
  4. By: Verbic, Miroslav; Majcen, Boris; Cok, Mitja
    Abstract: In the article we model education and human capital as major endogenous growth elements in a small open economy general equilibrium framework and consider several policy scenarios for Slovenia. Decrease of the PIT rate and increase of government spending on education turned out to be the most effective policy measures. It is important, though, to understand its transitory dynamic. Namely, as education expenditure is increased, certain amount of labour is temporarily withdrawn from its productive use and put into the educational system. Higher skill upgrade of labour requires longer and higher short-term labour force decrease, but also provides us with higher long-term growth. The households that would gain more utility from such policy scenarios are those with more skilled labour and thus higher income level.
    Keywords: education; endogenous growth; general equilibrium modelling; Slovenia
    JEL: C68 E24 D58 H52
    Date: 2009
  5. By: Deckers, Thomas; Hanck, Christoph
    Abstract: This paper discusses two longstanding questions in growth econometrics which involve multiple hypothesis testing. In cross sectional GDP growth regressions many variables are simultaneously tested for significance. Similarly, when investigating pairwise convergence of output for $n$ countries, $n(n-1)/2$ tests are performed. We propose to control the false discovery rate (FDR) so as not to erroneously declare variables significant in these multiple testing situations only because of the large number of tests performed. Doing so, we provide a simple new way to robustly select variables in economic growth models. We find that few other variables beyond the initial GDP level are needed to explain growth. We also show that convergence of per capita output using a time series definition with the necessary condition of no unit root in the log per-capita output gap of two economies does not appear to hold
    Keywords: Growth Empirics; Multiple Testing; Convergence; Bootstrap
    JEL: O47 C12
    Date: 2009–10–10
  6. By: Peter N. Ireland (Boston College)
    Abstract: This paper constructs a two-country stochastic growth model in which neutral and investment-specific technology shocks are nonstationary but cointegrated across economies. It uses this model to interpret data showing that while real investment has grown faster than real consumption in the United States since 1970, the opposite has been true in the Euro Area. The model, when estimated with these data, reveals that the EA missed out on the rapid investment-specific technological change enjoyed in the US during the 1990s; the EA, however, experienced more rapid neutral technological progress while the US economy stagnated during the 1970s.
    Keywords: growth, shocks, Euro area, technological change
    JEL: E32 F41 F43 O41 O47
    Date: 2009–09–30
  7. By: Xavier Pautrel (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: This article demonstrates that when finite lifetime is introduced in a Lucas (1988) growth model where the source of pollution is physical capital, the environmental policy may enhance the growth rate of a market economy, while pollution does not influence educational activities, labor supply is not elastic and human capital does not enter the utility function. The result arises from the “generational turnover effect” due to finite lifetime. It remains valid under conditions when the education sector uses final output besides time to accumulate human capital. Nevertheless, it does no longer hold when the source of pollution is output. Furthermore, this article demonstrates that ageing reduces the positive influence of the environmental policy when growth is driven by human capital accumulation à la Lucas (1988) and lifetime is finite. It also confirms for finite lifetime the result found by Vellinga (1999) with a single representative agent: environmental care does not influence optimal growth when utility is additive and pollution does not influence the ability of agents to be educated.
    Date: 2009
  8. By: DEBASIS BANDYOPADHYAY (University of Auckland); XUELI TANG (Deakin University)
    Abstract: We provide an empirically plausible endogenous growth model to prove analytically that sometimes a progressive redistribution from rich to poor lowers the growth rate of consumption per capita in all subsequent periods. The model accommodates the growth retarding effect of income inequality by combining the assumptions of no credit market and a production technology with diminishing returns to the combined inputs of physical and human capital. Also, to make the model’s assumptions consistent with the evidence reported by leading labor economists, we assume that the parental human capital sufficiently improves the effectiveness of expenditure on a child’s education, in order to induce increasing returns to scale in the education technology. A reduction in the progressivity of redistribution, under such education technology, enhances the average human capital of all future cohorts of parents, which in turn boosts the growth rate of average human capital. The immediate resulting gain in the growth rate of consumption per capita sufficiently outweighs the subsequent growth loss due to the decline in TFP brought about by the associated increase in income inequality. Consequently, in our model, a policy of progressive redistribution is dynamically inefficient.
    Keywords: heterogeneous ability, education technology, endogenous growth, progressive income tax rate.
    JEL: D61 E24 E62 O11
    Date: 2009–10–02
  9. By: Talan Iscan (Department of Economics, Dalhousie University)
    Keywords: consumption-income ratio; saving rate; medium-run; productivity growth; U.S.
    Date: 2009–09–21
  10. By: Galo Nuño (Banco de España)
    Abstract: In this paper we integrate Schumpeterian endogenous growth into a general equilibrium framework. By explicitely modelling the innovation and technology adoption process we are able to match some stylized economic facts such as entry rates and survival times of firms in the U.S. economy or the maximum convergence rates accross countries. Additionally, it allows us to propose a new definition of what a technology shock is and to compare it with the standard definition. Results show how this framework provides a plausible description of how economies grow and respond to the arrival of new technologies.
    Keywords: Medium-term business cycles, Schumpeterian growth, technology adoption
    JEL: E3 O3 O4
    Date: 2009–10
  11. By: Verbic, Miroslav; Majcen, Boris; Cok, Mitja
    Abstract: In the article, we model R&D as a major endogenous growth element in a small open economy general equilibrium framework and consider several R&D policy scenarios for Slovenia. Increase of the share of sectoral investment in R&D that is deductible from the CIT and increase of government spending on R&D turned out to be the most effective policy measures. While the former policy measure is still in part followed by an undesired dividend increase, the increase of government spending on R&D boosts long-run productivity in the economy, thus increasing the future value of firms, which is reflected in a desire dividend increase. The households that would gain more utility from such policy scenarios are those with more skilled and highly skilled labour, but not the very top earners in the economy.
    Keywords: endogenous growth; general equilibrium modelling; R&D; Slovenia
    JEL: O38 C68 D58 O40
    Date: 2009
  12. By: Burton A. Abrams (Department of Economics,University of Delaware); Jing Li; James G. Mulligan (Department of Economics,University of Delaware)
    Abstract: There is an on-going debate concerning the role that the steam engine played in fueling urban growth in the U.S. during the second half of the nineteenth century. While a consensus has been building that steam power played little or no role in affecting urban growth, we find evidence to the contrary by using previously untapped county-level data on steam power in manufacturing.
    Keywords: urbanization, technology, convergence
    JEL: N32 O14 O18
    Date: 2009
  13. By: Andrew McKay
    Abstract: Fiscal policy measures are a key means by which governments can influence distribution and poverty, but in fact the relationships between fiscal policy and poverty are not well understood. The most commonly used technique for assessing the distributional impact, benefit incidence analysis, is straightforward, but applied by itself it suffers from a number of serious limitations. Assessment of the impact of fiscal policy needs to be developed in various directions, including allowing for behavioural responses and incorporating a broader range of information. In parallel with this careful attention needs to be paid to more effective monitoring of the poverty impact of fiscal policy. [Discussion Paper No. 2002/43].
    Keywords: fiscal policy, poverty, benefit incidence analysis, transitional economies, behavioural responses,governments, distribution, distributional analysis, developed, information, developing, economic, social policy, environmentally sustainable growth,
    Date: 2009
  14. By: Angelo Antocii (Universita' degli Studi di Sassari); Marcello Galeotti (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Paolo Russu (Universita' degli Studi di Sassari)
    Abstract: In this paper we use global analysis techniques to investigate an economic growth model with environmental negative externalities, giving rise to a three-dimensional dynamic system (the framework is the one introduced by Wirl (1997)). The dynamics of our model admits a locally attracting steady state which is, in fact, a poverty trap, coexisting with another steady state possessing saddle-point stability. Global dynamical analysis shows that, under some conditions on the parameters, if the economy state variables are close enough to those of the attractive point, then there exists a continuum of equilibrium orbits approaching the poverty trap and one orbit approaching the saddle-point.
    Keywords: environmental externalities, indeterminacy, history versus expectations, global analysis of dynamic systems
    JEL: C61 C62 E13 E32 O13
    Date: 2009–10
  15. By: Ahmed Mohamed Badreldin (Faculty of Management Technology, The German University in Cairo)
    Abstract: One consequence of the current financial crisis is that many countries began to reevaluate their financial systems and recognize its flaws and drawbacks. They also began the search for alternative systems for their economies; one of the proposed systems is the current Islamic financial model. This model is still in its infancy and many modifications and additions are required. It also lacks the necessary financial performance measurement tools similar to those used by conventional banks for managers and investors alike. This paper evaluates this lack of performance measures. It then adapts a currently applied ROE Analysis Tool used in conventional banks, to the currently established model of Islamic Banks and tests its applicability and evaluates its usefulness. The findings suggest that such an adapted model would be quite successful for use in Islamic banks and would offer much better analysis and basis of comparison within the Islamic financial system. It also suggests that much of the previously measured performance of Islamic Banks is unsound and should be revised for accuracy and reliability because of the flawed methods used for measurement in the first place.
    Keywords: Performance measurement, ratio analysis, ROE, Islamic banks
    JEL: G21 G29
    Date: 2009–10

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