nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒11‒27
sixteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial Innovation and Endogenous Growth By Laeven, Luc; Levine, Ross; Michalopoulos, Stelios
  2. Modeling uncertainty in macroeconomic growth determinants using Gaussian graphical models By Adrian Dobra; Theo S. Eicher; Alexander Lenkoski
  3. Financial Crises and Economic Activity By Cecchetti, Stephen G; Kohler, Marion; Upper, Christian
  4. Growth After the Crisis By Rodrik, Dani
  5. Who Gets the Credit? And Does It Matter? Household vs. Firm Lending across Countries By Beck, Thorsten; Büyükkarabacak, Berrak; Rioja, Felix; Valev, Neven
  6. Predicting recoveries and the importance of using enough information By Cai, Xiaoming; Den Haan, Wouter
  7. Capital Flows to Developing Countries: The Allocation Puzzle By Pierre-Olivier; Olivier Jeanne
  8. 2008 Lawrence R. Klein Lecture -- Comparative Economic Development: Insights from Unified Growth Theory By Galor, Oded
  9. Foreign Currency Debt, Financial Crises and Economic Growth: A Long Run View By Michael D. Bordo; Christopher M. Meissner; David Stuckler
  10. The Myth of Financial Innovation and the Great Moderation By Den Haan, Wouter; Sterk, Vincent
  11. Competition Policy Trends and Economic Growth: Cross-National Empirical Evidence By Clougherty, Joseph A.
  12. Competition Policy and Productivity Growth: An Empirical Assessment By Buccirossi, Paolo; Ciari, Lorenzo; Duso, Tomaso; Spagnolo, Giancarlo; Vitale, Cristiana
  13. Keynesian government spending multipliers and spillovers in the euro area By Cwik, Tobias; Wieland, Volker
  14. Productivity and economic growth in Switzerland 1991-2005 By Rudolf, Barbara; Zurlinden, Mathias
  15. How Useful is Growth Literature for Policies in the Developing Countries? By Cooray, Arusha; B. Bhaskara Rao
  16. Trust in Banks? Evidence from normal times and from times of crises By Markus Knell; Helmut Stix

  1. By: Laeven, Luc; Levine, Ross; Michalopoulos, Stelios
    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.
    Keywords: Corporate Finance; Economic Growth; Entrepreneurship; Financial Institutions; Invention; Technological change
    JEL: G0 O31 O4
    Date: 2009–09
  2. By: Adrian Dobra (University of Washington); Theo S. Eicher (University of Washington); Alexander Lenkoski (University of Washington)
    Abstract: Model uncertainty has become a central focus of policy discussion surrounding the determinants of economic growth. Over 140 regressors have been employed in growth empirics due to the proliferation of several new growth theories in the past two decades. Recently Bayesian model averaging (BMA) has been employed to address model uncertainty and to provide clear policy implications by identifying robust growth determinants. The BMA approaches were, however, limited to linear regression models that abstract from possible dependencies embedded in the covariance structures of growth determinants. The recent empirical growth literature has developed jointness measures to highlight such dependencies. We address model uncertainty and covariate dependencies in a comprehensive Bayesian framework that allows for structural learning in linear regressions and Gaussian graphical models. A common prior specification across the entire comprehensive framework provides consistency. Gaussian graphical models allow for a principled analysis of dependency structures, which allows us to generate a much more parsimonious set of fundamental growth determinants. Our empirics are based on a prominent growth dataset with 41 potential economic factors that has been the utilized in numerous previous analyses to account for model uncertainty as well as jointness.
  3. By: Cecchetti, Stephen G; Kohler, Marion; Upper, Christian
    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.
    Keywords: Cost of Crisis; Crises; Output loss; Recovery; Systemic Banking Crisis
    JEL: E32 E44
    Date: 2009–11
  4. By: Rodrik, Dani
    Abstract: How hospitable will the global environment be for economic growth in the developing world as we come out of the present financial crisis? The answer depends on how well we manage the following tension. On the one hand, global macro stability requires that we prevent external imbalances from getting too large. On the other hand, growth in poor nations requires that the world economy be able to absorb a rapid increase in the supply of tradables produced in the developing world. It is possible to render these two requirements compatible, but doing so requires greater use of explicit industrial policies in developing countries, which have the potential of encouraging modern tradable activities without spilling over into trade surpluses. The “price” to be paid for greater discipline on real exchange rates and external imbalances is greater use (and permissiveness towards) industrial polices.
    Keywords: Economic growth; Financial crisis
    JEL: F43 O11
    Date: 2009–09
  5. By: Beck, Thorsten; Büyükkarabacak, Berrak; Rioja, Felix; Valev, Neven
    Abstract: While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity.
    Keywords: Financial intermediation; Firm credit; Household credit
    JEL: D14 G21 G28
    Date: 2009–08
  6. By: Cai, Xiaoming; Den Haan, Wouter
    Abstract: Several papers that make forecasts about the long-term impact of the current financial crisis rely on models in which there is only one type of financial crisis. These models tend to predict that the current crisis will have long lasting negative effects on economic growth. This paper points out the deficiency in this approach by analyzing the ability of "one-type-shock" models to correctly forecast the recovery from past economic downturns. It is shown that these models often overestimate the long-run impact of recessions and that slightly richer models that allow the effects of recessions to be both persistent and transitory predict recoveries much better.
    Keywords: financial crisis; forecasting; great recession; unit root
    JEL: C51 C53 E37
    Date: 2009–10
  7. By: Pierre-Olivier (University of California, Berkeley); Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital seems to flow more to countries that invest and grow less. We then introduce wedges into the neoclassical growth model and find that one needs a saving wedge in order to explain the correlation between growth and capital flows observed in the data. We conclude with a discussion of some possible avenues for research to resolve the contradiction between the model predictions and the data.
    Keywords: Capital Flows, Productivity, Growth
    JEL: F36 F43
    Date: 2009–11
  8. By: Galor, Oded
    Abstract: This paper explores the implications of Unified Growth Theory for the origins of existing differences in income per capita across countries. The theory sheds light on three fundamental layers of comparative development. It identifies the factors that have governed the pace of the transition from stagnation to growth and have thus contributed to contemporary variation in economic development. It uncovers the forces that have sparked the emergence of multiple growth regimes and convergence clubs, and it underlines the persistent effects that variations in pre-historical biogeographical conditions have generated on the composition of human capital and economic development across the globe.
    Keywords: Comparative Development; Demographic Transition; Diversity; Globalization; Growth; Human Capital; Malthusian Stagnation; Technological Progress
    JEL: F40 J10 J13 N0 O11 O14 O15 O33 O40
    Date: 2009–10
  9. By: Michael D. Bordo; Christopher M. Meissner; David Stuckler
    Abstract: Foreign currency debt is widely believed to increase risks of financial crisis, especially after being implicated as a cause of the East Asian crisis in the late 1990s. In this paper, we study the effects of foreign currency debt on currency and debt crises and its indirect short and long run effects on output between 1880-1913 and 1973-2003 for 45 countries. Greater ratios of foreign currency debt to total debt are associated with increased risks of currency and debt crises, although the strength of the association depends crucially on the size of a country’s reserve base and its policy credibility. We find that financial crises, driven by exposure to foreign currency, resulted in significant permanent output losses. We evaluate our findings by looking at the risk posed by high levels of foreign currency liabilities in eastern Europe in late 2008.
    JEL: F34 F36 F43 N10
    Date: 2009–11
  10. By: Den Haan, Wouter; Sterk, Vincent
    Abstract: Financial innovation is widely believed to be at least partly responsible for the recent financial crisis. At the same time, there are empirical and theoretical arguments that support the view that changes in financial markets played a role in the "great moderation". If both are true, then the price of reducing the likelihood of another crisis, e.g., through new regulation, could be giving up another episode of sustained growth and low volatility. However, this paper questions empirical evidence supporting the view that innovation in consumer credit and home mortgages reduced cyclical variations of key economic variables. We find that especially the behaviour of aggregate home mortgages changed less during the great moderation than is typically believed. For example, aggregate home mortgages declined during monetary tightenings, both before and during the great moderation. A remarkable change we do find is that monetary tightenings became episodes during which financial institutions other than banks increased their holdings in mortgages. Once can question the desirability of such strong substitutions of ownership during economic downturns.
    Keywords: consumer credit; impulse response functions; mortgages
    JEL: E32 E44 G21
    Date: 2009–10
  11. By: Clougherty, Joseph A.
    Abstract: Motivated by the general lack of empirical scholarship concerning the cross-national environment for competition policy, I present measures here of the overall resources dedicated to competition policy and the merger policy work-load for thirty-two antitrust jurisdictions over the 1992-2007 period. The data allow analysing a number of perceived trends in competition policy over the last two decades, and allow the generation of some factual insights concerning these trends: e.g., the budgetary commitment to competition policy in the cross-national environment for antitrust has substantially increased over this period; budgetary increases appear to be commensurate with increased antitrust workloads; yet, the role of economics does not appear to have substantially increased relative to the role of law. Moreover, I am also able to provide some evidence that budgetary commitments to antitrust institutions yield economic benefits in terms of improved economic growth: i.e., higher budgetary commitments to competition policy are associated with higher levels per-capita GDP growth.
    Keywords: competition policy; growth; policy trends
    JEL: C23 K21 L40 O40
    Date: 2009–10
  12. By: Buccirossi, Paolo; Ciari, Lorenzo; Duso, Tomaso; Spagnolo, Giancarlo; Vitale, Cristiana
    Abstract: This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy as measured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional set up and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.
    Keywords: Antitrust; Competition Policy; Deterrence; Institutions; Productivity Growth
    JEL: C23 K21 L4 O4
    Date: 2009–09
  13. By: Cwik, Tobias; Wieland, Volker
    Abstract: The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending --- the so-called Keynesian multiplier effect. Thus, we investigate whether the discretionary spending announced by Euro area governments for 2009 and 2010 is likely to boost euro area GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and different parameterizations. Therefore, we use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private spending for consumption and investment purposes significantly. If announced government expenditures are implemented with delay the initial effect on euro area GDP, when stimulus is most needed, may even be negative. Traditional Keynesian multiplier effects only arise in a model that ignores the forward-looking behavioral response of consumers and firms. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of euro appreciation.
    Keywords: crowding-out; fiscal policy; fiscal stimulus; government spending multipliers; New-Keynesian models
    JEL: E62 E63 H31
    Date: 2009–08
  14. By: Rudolf, Barbara (Swiss National Bank); Zurlinden, Mathias (Swiss National Bank)
    Abstract: In this paper, we analyse the sources of economic growth in Switzerland during the period 1991–2005. The results suggest that labour input and capital input contribute 0.57 pp and 0.45 pp, respectively, to the average annual GDP growth of 1.28%. The remaining 0.25 pp represent growth in multi-factor productivity, which is calculated as a residual. The estimate of growth in multi-factor productivity is lower than in previous studies because our measure of labour input takes changes in labour quality into account. Changes in labour quality explain 0.39 pp of the 0.45 pp contribution from labour input.
    Keywords: growth accounting; multi-factor productivity; capital services; constantquality labour
    JEL: E31 E37
    Date: 2009–09–01
  15. By: Cooray, Arusha (University of Wollongong); B. Bhaskara Rao (University of Western Sydney, Sydney, Australia)
    Abstract: This paper examines the growing gap between the theoretical and empirical growth literature and policy needs of the developing economies. Growth literature has focused mainly on long term growth outcomes, but policy makers of the developing economies need rapid improvements in the short to medium term growth rates; see Pritchett (2006). In this paper we argue that this gap can be reduced by distinguishing between the short to medium term dynamic effects of policies from their long run equilibrium effects. With data from Singapore, Malaysia and Thailand, we show that an extended version of the Solow (1956) model is well suited for this purpose. We find that the short to medium term growth effects of the investment ratio are quite significant and they may persist for up to 10 years.
    Keywords: Solow Growth Model, Endogenous Growth, Dynamic Growth Effects of Investment Ratio, Policies for Developing Countries.
    JEL: O11
    Date: 2009
  16. By: Markus Knell (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna); Helmut Stix (Oesterreichische Nationalbank)
    Abstract: Trust in financial institutions is of great importance for financial intermediation. Against this background, we study two questions: Has trust in banks declined during the global financial crisis and what factors determine the level of trust in banks? Employing survey evidence from Austrian households, we show that trust in banks is mainly affected by "subjective" variables like the individuals' assessment of the current economic and financial situation and by their future outlooks. After controlling for these variables we show that the financial crisis has caused a reduction in trust (around -7.5pp) which is sizable but not dramatic. Even at its lowest point (in the first quarter of 2009) 65% still report to have trust in the banking system, which is a higher percentage than for many other institutions. Furthermore, the drop is only slightly larger than the drop observed after a small, non-systemic crisis that occurred in 2006. Thus, the much-stressed notion of a genuine "trust crisis" is not reflected in our data. Finally, we provide evidence that the degree of individual information does not influence trust, that banking trust is contagious and that the extension of deposit insurance coverage in October 2008 had a positive effect on trust.
    Keywords: Trust, Banking Sector, Financial Crisis
    JEL: G21 Z13 O16
    Date: 2009–11–10

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