nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒12‒19
24 papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Fiscal Competition, Decentralization, Leviathan, and Growth By Ken Tabata
  2. Dynamic Ethnic Fractionalization and Economic Growth in the Transition Economies from 1989 to 2007 By Campos, Nauro F.; Kuzeyev, Vitaliy; Saleh, Ahmad
  3. The Size of the Government and Economic Growth: An Empirical Study of Sri Lanka By Shanaka Herath
  4. Fiscal policy and economic growth: empirical evidence from EU countries By Benos, Nikos
  5. Euro Area Investment: the Generation of GDP Growth and the Marginal Product of Capital By Ryan, Mary
  6. Tax Policy for Economic Recovery and Growth. By Christopher Heady; Åsa Johansson; Jens Arnold; Bert Brys; Laura Vartia
  7. Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data By Petreski, Marjan
  8. Panel data estimates of the growth and level effects of human capital in the selected Asian countries By Rao, B. Bhaskara; Singh, Rup
  9. HUMAN CAPITAL AND GROWTH: NEW EVIDENCES FROM AFRICAN DATA By Dorothée Boccanfuso; Luc Savard; Bernice E. Savy
  10. How Changes in Oil Prices Affect the Macroeconomy By Brian DePratto; Carlos de Resende; Philipp Maier
  11. Government Spending Composition in a Simple Model of Schumpeterian Growth By Simon Wiederhold
  12. On the links between inflation, output growth and uncertainty: system-GARCH evidence from the Turkish economy By Korap, Levent
  13. Further Evidence on Public Spending and Economic Growth in East Asian Countries By Kumar, Saten
  14. Inflation and investment in monetary growth models By Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
  15. Productivity Growth and Levels in France, Japan, the United Kingdom and the United States in the Twentieth Century By Gilbert Cette; Yusuf Kocoglu; Jacques Mairesse
  16. Thresholds in the process of international financial integration By Kose, M. Ayhan; Prasad, Eswar S.; Taylor, Ashley D.
  17. The United States as a growth leader for the Euro Area - A multi-sectoral approach By McQuinn, Kieran; Slevin, Geraldine
  18. Forecasting Euro-area recessions using time-varying binary response models for financial. By Bellégo, C.; Ferrara, L.
  19. Total Factor Productivity growth, Technological Progress, and Efficiency Changes: Empirical Evidence from Canadian Manufacturing Industries By Mahamat Hamit-Haggar
  20. On the Growth and Welfare Effects of Defense R&D By Angus C. Chu; Ching-Chong Lai
  21. Measuring post-crisis productivity for Jamaican banks By Daley, Jenifer; Matthews, Kent
  22. La acumulación de capital en la Argentina en la posguerra By Burachik, Gustavo
  23. Japan's Lost Decade: Does Money have a Role? By Canova, Fabio; Menz, Tobias
  24. US Fiscal Indicators, Inflation and Output By Yunus Aksoy; Giovanni Melina

  1. By: Ken Tabata (Kwansei Gakuin University)
    Abstract: This paper studies the implications of different fiscal regimes (i.e. centralized vs decentralized) for economic growth and welfare by incorporating Wilson (2005)-type fiscal competition model into a Barro (1990)-type endogenous growth model. We show that fiscal decentralization is more desirable than fiscal centralization for economic growth, when the degree of selfishness of central government bureaucrats is high, and the relative political power of the young to the old is low. We also show that the growth-maximizing fiscal regime is also welfare-maximizing.
    Keywords: Fiscal competition, Decentralization, Leviathan, Overlapping generations
    JEL: H71 H72 E62
    Date: 2009–11
  2. By: Campos, Nauro F.; Kuzeyev, Vitaliy; Saleh, Ahmad
    Abstract: In their survey of the literature on ethnic fractionalization and economic performance, Alesina and La Ferrara (JEL 2005) identify two main directions for future research. One is to improve the measurement of diversity and the other to treat diversity as an endogenous variable. This paper tries to address these two issues: it investigates the effects of ethnic fractionalization on economic growth across countries using unique time-varying measures. We first replicate the finding of a weak effect of exogenous diversity on growth and then we show that accounting for how diversity changes over time and treating it as an endogenous variable makes a difference. Once diversity is instrumented (with lagged diversity and latitude), it shows a significant negative impact on economic growth which is robust to different specifications, polarization measures, econometric estimators, as well as to the use of an index of ethnic-religious-linguistic fractionalization.
    Keywords: ethnic diversity; fractionalization; growth.; polarization
    JEL: H1 O11 O55 Z12
    Date: 2009–12
  3. By: Shanaka Herath
    Date: 2009
  4. By: Benos, Nikos
    Abstract: This paper studies whether a reallocation of the components of public spending and revenues can enhance economic growth using data on 14 EU countries during 1990-2006. The results provide support for endogenous growth models. Specifically, the findings are: a) public expenditures on infrastructure (economic affairs, general public services) and property rights protection (defense, public order-safety) exert a positive impact on growth; b) distortionary taxation depresses growth; c) government expenditures on human capital enhancing activities (education, health, housing-community amenities, environment protection, recreation-culture-religion) and social protection do not have a significant growth effect. However, when coefficient heterogeneity across countries along with non-linearities are taken into account and public expenditures are further disaggregated, we have in addition that government outlays on education, defense and social protection are growth-enhancing. These findings are robust to changes in specification and estimation methodology.
    Keywords: Panel Data; Fiscal Policy; Taxation; Government Expenditures.
    JEL: E62 C23
    Date: 2009–09
  5. By: Ryan, Mary (Central Bank and Financial Services Authority of Ireland)
    Abstract: Reviewing economic performance over the past three decades, it is apparent that GDP growth in the US has been faring better than that in the Euro Area. This paper aims to identify periods where growth rates have diverged between the two economic areas with particular focus on the role of investment as a means of accumulating productive capital stock. The relative importance of capital in GDP growth is assessed for the US, Euro Area aggregate and individual Member States. Investment growth rates for the Euro Area are reviewed on a disaggregated basis, noting the relative contributions of each country to the total. Finally, the Marginal Product of Capital is calculated for each country, with a view to assessing whether disparities in investment growth rates between Euro Area countries can be understood in this context.
    Date: 2009–11
  6. By: Christopher Heady; Åsa Johansson; Jens Arnold; Bert Brys; Laura Vartia
    Abstract: This paper identifies tax policy that both speeds recovery from the current economic crisis and contributes to long-run growth. This is a challenge because short-term recovery requires increases in demand while long-term growth requires increases in supply. As short-term tax concessions can be hard to reverse, this implies that policies to alleviate the crisis could compromise long-run growth. The analysis makes use of recent evidence on the impact of tax structure on economic growth to identify which growth-enhancing tax changes can also aid recovery, taking account of the need to protect those on low incomes.
    Keywords: Taxation; Tax Design; Tax Policy; Economic growth; Economic recovery
    JEL: H20 H30 O40
    Date: 2009–12
  7. By: Petreski, Marjan
    Abstract: The aim of this paper is to empirically investigate the relationship between exchange-rate regime and economic growth, building on underlying theoretical examination and shortcomings of empirical literature. Channels through which regime might influence growth could be distinguished at: i) level of uncertainty imposed by certain regime, which than affects trading and investment decisions; ii) regime as shock absorber; iii) its linkage to productivity growth, which usually interferes with financial development. Empirical research offers divergent result though and is criticized because of: measurement error in regimes’ classification; appropriateness of growth framework; endogeneity of exchange-rate regime and/or other regressors; Lucas critique; sample-selection bias and survivor bias. Applying dynamic system-GMM panel estimation on 169 countries over the period 1976-2006 and addressing all shortcoming of the empirical literature, this paper finds that the exchange-rate regime is not statistically significant in explaining growth. The conclusion is robust to dividing the sample on developing versus advanced countries and considering two sub-periods. In all specifications, the exchange-rate regime does not even approach conventional significance levels. Observation de-facto versus de-jure regime matters neither. No empirical grounds were established that coefficients in the regression suffer the Lucas critique. Hence, the main conclusion is that, as nominal variable, the exchange rate regime does not have explanatory power over growth. --
    Keywords: Exchange rate regime,economic growth
    JEL: E42 F31
    Date: 2009
  8. By: Rao, B. Bhaskara; Singh, Rup
    Abstract: This paper uses an extension to the Solow growth model to estimate the level and growth effects of human capital. Empirical results for a panel of 10 Asian countries from 1960-2003 show that both the growth and level effects of human capital are positive and significant.
    Keywords: Level and growth effects of human capital; extension to the Solow growth model.
    JEL: O47
    Date: 2009–12–09
  9. By: Dorothée Boccanfuso (GREDI, Faculte d'administration, Université de Sherbrooke); Luc Savard (GREDI, Faculte d'administration, Université de Sherbrooke); Bernice E. Savy (GREDI, Faculte d'administration, Université de Sherbrooke)
    Abstract: Economic theory long acknowledged a positive relation between human capital and economic growth (Smith, 1776; Becker, 1964), which was nevertheless called into question in the late 1990s (Caselli et al. 1996; Pritchett, 2001). The two primary criticisms evoked were the failure to consider diminishing returns to education and qualitative aspects of the stock of human capital. This work aims to redress inadequacies in the literature related to the usual proxy of human capital by advancing a composite indicator of human capital (PCA). This indicator allows for an integration of the qualitative aspects in question and uses the indicator of the stock of human capital (Mincer, 1974) to take diminishing returns into consideration. Adopting the methodology developed by Islam (1995) allows for the impact of human capital to become positive once again in the process of economic growth. The data also reveal a conditional convergence process for the 22 African countries considered over the period 1970 to 2000.
    Keywords: Economic growth, human capital, convergence, Africa
    JEL: O18 O47 O55
    Date: 2009–12–11
  10. By: Brian DePratto; Carlos de Resende; Philipp Maier
    Abstract: We estimate a New Keynesian general-equilibrium open economy model to examine how changes in oil prices affect the macroeconomy. Our model allows oil price changes to be transmitted through temporary demand and supply channels (affecting the output gap), as well as through persistent supply side effects (affecting trend growth). We estimate this model for Canada, the United Kingdom, and the United States over the period 1971-2008, and find that it matches the data very well in terms of first and second moments. We conclude that (i) energy prices affect the economy primarily through the supply side, whereas we do not find substantial demand-side effects; (ii) higher oil prices have temporary negative effects on both the output gap and on trend growth, which translates into a permanent reduction in the level of potential and actual output. Also, results for the United States indicate that oil supply shocks have more persistent negative effects on trend growth than oil demand shocks. These effects are statistically significant; however, our simulations also indicate that the effects are economically small.
    Keywords: Economic models; Interest rates; Transmission of monetary policy; Productivity; Potential output
    JEL: F41 Q43
    Date: 2009
  11. By: Simon Wiederhold (Friedrich Schiller University Jena, GK-EIC "The Economics of Innovative Change")
    Abstract: This paper investigates the relevance of government purchasing behavior for innovation-based economic growth. We construct a parsimonious Schumpeterian growth model in which demand from the public sphere can effectively alter the economy's rate of technological change. We incorporate results of various empirical studies arguing that public sector demand acts as incentive for private innovation activities. In contrast to the standard Schumpeterian growth framework, we account for industry heterogeneity in terms of innovation potential. This extension allows to bring government demand policy within the realm of the growth policy debate. By varying the composition of its purchases, the government can induce a reallocation of private resources to stimulate the rate of technological change. This comes along with temporarily faster economic growth. Moreover, our welfare analysis implies that it is always worth implementing a policy in which industries benefit from public purchases subject to their specific innovation size.
    Keywords: public demand, endogenous technological change, Schumpeterian growth
    JEL: E62 H54 H57 O31 O32 O41
    Date: 2009–12–09
  12. By: Korap, Levent
    Abstract: In this study, the causal relationships between inflation, output growth and uncertainty have been re-examined for the Turkish economy. Based on the system-GARCH methodology, estimation results reveal that for the 1987M01 2008M09 investigation period with monthly data, the mutual Granger causality between inflation and inflation uncertainty cannot be rejected in a positive way. For the output growth and its uncertainty relationship, it is observed that the larger the output growth the lower the output growth uncertainty. Some evidence have also been obtained in favor of that an increase in inflation uncertainty lowers output growth and that an increase in the latter lowers the former. Furthermore, an increase in output growth uncertainty is likely to lead to more inflation. A sensitivity analysis implemented for the post-2001 period supports to a great extent these results. Consequently, it is inferred that policies aiming at reducing inflation would lead to a more efficient functioning of the price system, and this would contribute to the real output growth.
    Keywords: Inflation ; Output growth ; System-GARCH ; Turkish economy ;
    JEL: C51 C32 E31
    Date: 2009–12
  13. By: Kumar, Saten
    Abstract: This article examines Wagner’s Law for East Asian countries (China, Hong Kong, Japan, Taiwan and South Korea) for the period 1960 to 2007. Using the Gregory and Hansen (1996a & b) structural break techniques, we find a cointegrating relationship between real government spending and real income. Our preferred Gregory and Hansen models are with the level shift for Hong Kong and Taiwan and regime shift (change in intercept and slope coefficients) for China, Japan and South Korea. The income elasticity of government spending ranges from 0.756 to 1.155. With these findings, we infer that Wagner’s Law does hold for these countries, except for Hong Kong where the income elasticity is not highly statistically significant.
    Keywords: Real Government Spending; Real Income; Gregory and Hansen Structural Break Techniques.
    JEL: H50 C22
    Date: 2009–10–20
  14. By: Ciżkowicz, Piotr; Hołda, Marcin; Rzońca, Andrzej
    Abstract: The article contains a review of monetary growth models. We analyze the ways in which money is introduced into these models and the models’ conclusions about the impact of inflation on investment. We find that the models differ widely with respect to the ways in which they account for money and its functions in the economy as well as with respect to the “technical” assumptions, about e.g. the form of the utility function or the production function. Despite these differences most models fail to adequately capture money’s role and are highly sensitive to changes in the assumptions. Moreover, the models differ in their predictions about inflation’s impact on capital accumulation, with some models offering conclusions that are not only counterintuitive but also inconsistent with empirical evidence.
    Keywords: investment, inflation, monetary models of growth, monetary search theoretic models
    JEL: O42 E31 E22 E52
    Date: 2009–11
  15. By: Gilbert Cette; Yusuf Kocoglu; Jacques Mairesse
    Abstract: This study compares labor and total factor productivity (TFP) in France, Japan, the United Kingdom and the United States in the very long (since 1890) and medium (since 1980) runs. During the past century, the United States has overtaken the United Kingdom and become the leading world economy. During the past 25 years, the four countries have also experienced contrasting advances in productivity, in particular as a result of unequal investment in information and communication technology (ICT). The past 120 years have been characterized by: (i) rapid economic growth and large productivity gains in all four countries; (ii) a long decline of productivity in the United Kingdom relative to the United States, and to a lesser extent also to France and Japan, a relative decline that was interrupted by the second world war (WW2); (iii) the remarkable catching-up to the United States by France and Japan after WW2, that stopped in the case of Japan during the 1990s. Capital deepening (at least to the extent this can be measured) accounts for a large share of the variations in performance; increasingly during the past 25 years, this has meant ICT capital deepening. However, the capital contribution to growth varies considerably over time and across the four countries, and it is always less important, except in Japan, than the contribution of the various other factors underlying TFP growth, such as, among others, labor skills, technical and organizational changes and knowledge spillovers. Most recently (in 2006), before the current financial world crisis, hourly labor productivity levels were slightly higher in France than in the United States, and noticeably lower in the United Kingdom (by roughly 10%) and even lower in Japan (30%), while TFP levels are very close in France, the United Kingdom and the United States, but much lower (40%) in Japan.
    JEL: E22 J24 N10 O47 O57
    Date: 2009–12
  16. By: Kose, M. Ayhan; Prasad, Eswar S.; Taylor, Ashley D.
    Abstract: The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration. Indeed, a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses. A major complication, however, is that there seem to be certain"threshold"levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness. This paper develops a unified empirical framework for characterizing such threshold conditions. The analysis finds that there are clearly identifiable thresholds in variables such as financial depth and institutional quality -- the cost-benefit trade-off from financial openness improves significantly once these threshold conditions are satisfied. The findings also show that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared with those for debt liabilities.
    Keywords: Debt Markets,Economic Theory&Research,Currencies and Exchange Rates,Emerging Markets,Achieving Shared Growth
    Date: 2009–12–01
  17. By: McQuinn, Kieran (Central Bank and Financial Services Authority of Ireland); Slevin, Geraldine (Central Bank and Financial Services Authority of Ireland)
    Abstract: In this paper we examine the role played by technology spillovers between the United States and the Euro area. We explicitly assume that the United States acts as a growth leader for Europe and that the Euro area is constantly converging to US total factor productivity (TFP) levels. As a result, a growing divergence in the level of US TFP vis-`a-vis that of Europe results in an increase in the growth rate of Euro area TFP. The model is applied to TFP data from 26 subsectors of both economies. The role of greater ICT adoption in increasing Euro area TFP is also explored.
    Date: 2009–11
  18. By: Bellégo, C.; Ferrara, L.
    Abstract: Recent macroeconomic evolutions during the years 2008 and 2009 have pointed out the impact of financial markets on economic activity. In this paper, we propose to evaluate the ability of a set of financial variables to forecast recessions in the euro area by using a non-linear binary response model associated with information combination. Especially, we focus on a time-varying probit model whose parameters evolve according to a Markov chain. For various forecast horizons, we provide a readable and leading signal of recession by combining information according to two combining schemes over the sample 1970-2006. First we average recession probabilities and second we linearly combine variables through a dynamic factor model in order to estimate an innovative factor-augmented probit model. Out-of-sample results over the period 2007-2008 show that financial variables would have been helpful in predicting a recession signal as September 2007, that is around six months before the effective start of the 2008-2009 recession in the euro area.
    Keywords: Macroeconomic forecasting, Business cycles, Turning points, Financial markets, Non-linear time series, Combining forecasts.
    JEL: C53 E32 E44
    Date: 2009
  19. By: Mahamat Hamit-Haggar (Department of Economics, University of Ottawa)
    Abstract: As productivity (growth) appears to be the single most important determinant of a nation’s living standard or its level of real income over long periods of time, it is important to better understand the sources of productivity growth. In Canada, total factor productivity (TFP) growth is the major contributing factor (relative to changes in capital intensity) to labour productivity growth, particularly in manufacturing sector. However, the TFP gap is also the main source of labour productivity gap between Canada and other industrialized (OECD) countries in recent years. In this paper, a stochastic frontier production model is applied to Canadian manufacturing industries to investigate the sources of TFP growth. Using a comprehensive panel data set of eighteen industries over the period 1990-2005 and the approach proposed by Kumbhakar et al. (1991) and Kumbhakar and Lovell (2000), we decompose TFP growth into technological progress, changes in technical efficiency, changes in allocative efficiency and scale effects. The decomposition reveals that during the period under study, technological progress has been the main driving force of productivity growth, while negative efficiency changes observed in certain industries have contributed to reduce average productivity growth. In addition, our empirical results show that research and development (R&D) expenditure and information and communications technology (ICT) investment, as well as trade openness exert a positive impact on productivity growth through the channel of efficiency gains. We argue that the decomposition carried out in this study may be very helpful to elicit the correct diagnosis of Canada’s productivity problem and develop effective policies to reverse the situation, and thereby reduce Canada’s lagging productivity gap.
    Keywords: Canadian manufacturing, Stochastic frontier, TFP growth, Efficiency changes.
    JEL: L6 O16 O47
    Date: 2009
  20. By: Angus C. Chu; Ching-Chong Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: In the US, defense R&D share of GDP has decreased significantly since 1960. To analyze the implications on growth and welfare, we develop an R&D-based growth model that features the crowding-out and spillover effects of defense R&D on civilian R&D. The model also captures the effects of defense technology on (i) national security resembling consumption-type public goods and (ii) aggregate productivity via the spin-off effect resembling productive public goods. In this framework, economic growth is driven by market-based civilian R&D as in standard R&D-based growth models and government-financed public goods (i.e., defense R&D) as in Barro (1990). We find that defense R&D has an inverted-U effect on growth, and the growth-maximizing level of defense R&D is increasing in the spillover and spin-off effects. As for the welfare-maximizing level of defense R&D, it is increasing in the security-enhancing effect of defense technology, and there exists a critical degree of this security-enhancing effect below (above) which the welfare-maximizing level is below (above) the growth-maximizing level.
    Keywords: defense R&D, public goods, economic growth, social welfare
    JEL: H41 H56 O38 O40
    Date: 2009–07
  21. By: Daley, Jenifer; Matthews, Kent (Cardiff Business School)
    Abstract: The study examines the changes to total factor productivity of Jamaican banks between 1998 and 2007. Using Data Envelopment Analysis with bootstrap to construct a Malmquist index, bank productivity is measured and decomposed into technical progress and efficiency. The results suggest an inconsistent growth pattern for banks between 1998 and 2007 driven mainly by efficiency gains in the immediate post-crisis period to 2002, and by technological progress towards the end of the sample period. The second largest banks along with merchant and locally-owned banks showed significant productivity growth in some models, with modest growth for commercial and foreign-owned banks.
    Keywords: Bank productivity; Malmquist Productivity index; DEA; bootstrapping; Jamaica
    JEL: G21 G28
    Date: 2009–12
  22. By: Burachik, Gustavo
    Abstract: This essay suggest a theoretical framework for studying the accumulation process in an historical perspective. This framework comprises the expansion routes effectively or potentially open to big firm growth, available channels for funding investment expenditures and the barriers to corporate growth emerging in both the abovementioned spheres. Based on this framework the essay offers a review of the literature on problems for capital accumulation in Argentina. As a result, it is suggested, a new view of this topic emerges. Several similarities with other Latin American countries are marked.
    Keywords: large firms - capital accumulation - industrialization - import substitution - national bourgeoisie - postwar period
    JEL: O54 O16 O14
    Date: 2009
  23. By: Canova, Fabio; Menz, Tobias
    Abstract: We study the contribution of the stock of money to the macroeconomic outcomes of the 1990s in Japan using a small scale structural model. Likelihood-based estimates of the parameters are provided and time stabilities of the structural relationships analyzed. Real balances are statistically important for output and inflation fluctuations and their role has changed over time. Models which give money no role give a distorted representation of the sources of cyclical fluctuations. The severe stagnation and the long deflation are driven by different causes.
    Keywords: deflation; Japan's Lost decade; money; structural model
    JEL: E31 E32 E52
    Date: 2009–12
  24. By: Yunus Aksoy; Giovanni Melina (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: In this paper we explore the information content of a large set of fiscal indicators for US real output growth and inflation. We provide evidence that fluctuations in certain fiscal variables contain valuable information to predict fluctuations in output and prices. The distinction between federal and state-local fiscal indicators yields useful insights and helps define a new set of stylized facts for US macroeconomic conditions. First, we find that variations in state-local indirect taxes as well as state government surplus or deficit help predict output growth. Next, the federal counterparts of these indicators contain valuable information for inflation. Finally, state-local expenditures help predict US inflation. A set of formal and informal stability tests confirm that these relationships are stable. The fiscal indicators in questions are also among the ones that yield the best in-sample and out-of-sample performances.
    Date: 2009–12

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