nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒01‒23
eighteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. How Does Financial Openness Affect Economic Growth and its Components? By Garita, Gus
  2. An empirical analysis of the interlinkages between financial sector and economic growth By Pirtea , Marilen; Dima, Bogdan; Milos, Laura Raisa
  3. Currency Misalignments and Growth: a New Look Using Nonlinear Panel Data Methods By Sophie Bereau; Antonia Lopez Villavicencio; Valerie Mignon
  4. Financial Volatility and Economic Activity By Antonio Mele
  5. Remittances, Capital Flows and Financial Development during the Mass Migration Period, 1870-1913 By Rui Esteves; David Khoudour-Casteras
  6. Modern Knowledge Based Economy: all-factors endogenous growth model and total investment allocation. By Bormotov, Michael
  7. Monetary Policies and the Economic Growth By Scarlat, Valentin
  8. The Triple Crisis and the Global Aid Architecture By Addison, Tony; Arndt, Channing; Tarp, Finn
  9. Institutions and geography: Empirical test of spatial growth models for European regions By Giuseppe Arbia; Michele Battisti; Gianfranco Di Vaio
  10. Assessing the Sustainability of Credit Growth: the Case of Central and Eastern European Countries By Virginie Coudert; Cyril Pouvelle
  11. Is Agglomeration really good for Growth? Global Efficiency and Interregional Equity By Fabio Cerina; F. Mureddu
  12. Competition and Economic Growth: a Critical Survey of the Theoretical Literature By Scopelliti, Alessandro Diego
  13. Heterogeneity, trust, human capital and productivity growth: Decomposition analysis By Yamamura, Eiji; Shin, Inyong
  14. Growth and Firm Dynamics with Horizontal and Vertical R&D By Pedro Rui Mazeda Gil; Paulo Brito; Óscar Afonso
  15. Measuring intangible capital and its contribution to economic growth in Europe By van Ark, Bart; Hao, Janet X.; Corrado, Carol; Hulten, Charles
  16. Economic growth, corruption and tax evasion By Roy Cerqueti; Raffaella Coppier
  17. R&D capital and economic growth: The empirical evidence By Mc Morrow, Kieran; Röger, Werner
  18. How Do Small Businesses Finance their Growth Opportunities? – The Case of Recovery from the Lost Decade in Japan? By Daisuke Tsuruta

  1. By: Garita, Gus
    Abstract: This paper aims at uncovering the different channels through which de facto financial openness affects economic growth and its components. The results herein indicate that de facto measures of financial openness (as proxied by different types of capital inflows) stimulate economic growth. In particular, the results indicate that higher levels of FDI inflows stimulate GDP per worker growth and crowd-in domestic investment for developing and emerging markets. As far as developed economies, I find that higher levels of both FDI and Portfolio-type inflows improve GDP per worker growth, but that only the latter type of capital stimulates capital accumulation with crowding-in effects. The one similarity between developed and developing economies is that FDI positively affects total factor productivity in both cases.
    Keywords: Capital account liberalization; capital flows; dynamic panels; foreign direct investment; total factor productivity
    JEL: C23 F21 F41 F43 O40 F36
    Date: 2009–07–14
  2. By: Pirtea , Marilen; Dima, Bogdan; Milos, Laura Raisa
    Abstract: There is a growing literature body which examines the connections between financial status and economic growth. The aim of this paper is to examine the mechanism through which this positive connection is realized. The methodology is based on a pool data regression with dynamic of real GDP as dependent variable and some key variables of the financial sector. The main output of our study consists in the thesis that the financial status matter for the economic growth.
    Keywords: finance; growth; cost of capital; yield
    JEL: G10
    Date: 2009–11–24
  3. By: Sophie Bereau; Antonia Lopez Villavicencio; Valerie Mignon
    Abstract: The aim of this paper is to investigate the link between currency misalignments and economic growth. Relying on panel cointegration techniques, we calculate real exchange rate (RER) misalignments as deviations of actual RERs from their equilibrium values for a set of advanced and emerging economies. Estimating panel smooth transition regression models, we show that RER misalignments have a differentiated impact on economic growth depending on their sign: whereas overvaluations negatively affect economic growth, real exchange rate undervaluations significantly enhance it. This result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth.
    Keywords: Growth; exchange rate misalignments; nonlinearity; PSTR models
    JEL: F31 O47 C23
    Date: 2009–09
  4. By: Antonio Mele
    Abstract: Does capital markets uncertainty affect the business cycle? We find that financial volatility predicts 30% of post-war economic activity in the United States, and that during the Great Moderation, aggregate stock market volatility explains, alone, up to 55% of real growth. In out-of-sample tests, we find that stock volatility helps predict turning points over and above traditional financial variables such as credit or term spreads, and other leading indicators. Combining stock volatility and the term spread leads to a proxy for (i) aggregate risk, (ii) risk-premiums and (iii) monetary policy, which is found to track, and anticipate, the business cycle. At the heart of our analysis is a notion of volatility based on a slowly changing measure of return variability. This volatility is designed to capture long-run uncertainty in capital markets, and is particularly successful at explaining trends in the economic activity at horizons of six months and one year.
    Date: 2009–11
  5. By: Rui Esteves; David Khoudour-Casteras
    Abstract: This paper addresses the question whether the substantial financial flows received by emigration countries in the four decades running up to World War I contributed to domestic financial development in peripheral Europe. We quantify a sizable and significant relation between remittances and measures of development of the financial sector that is both larger than the contribution of other international capital flows and than the best estimates of the same relation in our days. Given that financial development is regularly included among the conditions for economic growth and catch up of developing nations, this paper adds to our understanding of the multiple impacts of the mass migration phenomenon on the economies of emigration countries.
    Keywords: International migration; remittances; financial development
    JEL: F24 N13 O16
    Date: 2009–06
  6. By: Bormotov, Michael
    Abstract: The core problem in focus of this paper is studying how modern economy can keep sustained growth in terms of increasing reliance on both knowledge and human capitals and dependence on continuously depleting non-renewable natural resources. The aim of this paper is to bridge in some way the gap between macroeconomic growth models and models of technological evolution. The ultimate goal of this work is to determine the optimal rate of savings and the optimal, i.e. delivering maximum cumulative consumption during given period , total investment allocation among physical capital, human capital, natural capital and knowledge capital, all subject of endogenous growth, for the modern knowledge based economy where savings are the unique source of investments. The neo-classical CES production function extended to four factors including physical capital K, human capital L, raw materials (natural capital) R and knowledge capital A in three different forms: for perfect substitution, for the case of no substitution and for the case of unit elasticity of substitution, is accepted as the basic growth model. There are four most important features which distinguish our all-factors endogenous growth model from basic endogenous growth model: 1.The total national capital stock which reflects the growth potential of economy is considered consisting of four parts: physical capital, human capital, natural capital and knowledge capital. Therefore our model embeds all four factors of production (physical capital, human capital, natural capital and knowledge capital) as opposed to three factors (physical capital, labour and knowledge) included in Romer model. 2. The labour, represented by Human capital, is not assumed equal to population and is measured in money units (total earnings of qualified labour which is considered equal to total household income). Investments in Education system transform Population in Human capital. Therefore in our model labour supply grows proportionally investments in human capital, whine the path of population growth is given exogenously according to exponential or logistics curves. 3. Marginal rate of consumption and consequently marginal rate of savings are assumed constant during exploring period; they are not given as initial conditions but are subject of optimisation inside the model. 4. Growth of every of four employed factors is considered depending on investments in corresponding sector of economy only. It is assumed that investments, measured in money units, absorb and exhaustively represent all underlying resources (physical capital, labour, raw materials). A three steps algorithm for finding the optimum solution is created. The first step defines in general an optimum structure of investment allocation among K, L and R. The second step defines optimum investment allocation between A from one hand and all other factors from the other hand. The third step applies defined optimum value on optimum structure.
    Keywords: knowledge based economy; economic cycles; endogenous growth; investment; optimization; knowledge capital; human capital; natural resources.
    JEL: E32 O30 E21
    Date: 2010–01–10
  7. By: Scarlat, Valentin
    Abstract: Talking about the economic growth, is to be stressed the essential contribution of the investment to a country economic development, role which is unanimously recognized and accepted. It is well-known that even the most developed market economies were built up with notable investment efforts, in order to enable a high efficiency of the fixed assets and to ensure a rational use of the natural resources and of the labour force. The investment process is mainly conditioned by the imprevisible action of certain elements, both immanent to the economic system and exogenous to it, as well, such as: technology, politics, optimistic and pessimistic forecasting, population confidence, taxes and government expenditures, monetary base fluctuation etc.
    Keywords: economic growth; investment; high efficiency; taxes and government expenditures; monetary policy
    JEL: E42 E52 F43
    Date: 2009–09–15
  8. By: Addison, Tony; Arndt, Channing; Tarp, Finn
    Abstract: The global economy is passing through a period of profound change. The immediate concern is with the financial crisis, originating in the North. The South is affected via reduced demand and lower prices for their exports, reduced private financial flows, and falling remittances. This is the first crisis. Simultaneously, climate change remains unchecked, with the growth in greenhouse gas emissions exceeding previous estimates. This is the second crisis. Finally, malnutrition and hunger are on the rise, propelled by the recent inflation in global food prices. This constitutes the third crisis. These three crises interact to undermine the prosperity of present and future generations. Each has implications for international aid and underline the need for concerted action.
    Keywords: financial crisis, global food prices, climate change
    Date: 2010
  9. By: Giuseppe Arbia; Michele Battisti; Gianfranco Di Vaio
    Abstract: This article provides an empirical assessment of the growth experiences of European regions, during the period 1991-2004, by taking into account the spatial effects due to both institutions and geography. These effects have been modeled by means of specific controls and by using a non-conventional spatial weight matrix. Results favour a model dealing with substantive spatial externalities. Within this framework, the country-specific institutions are strongly and positively related to the regional productivity’s growth rate. In addition, the geo-institutional proximity increases the spatial dependence of the regional output per worker and raises the speed of convergence. By contrast, the pure geographical metrics is underperforming, while underestimating the convergence dynamics.
    Keywords: Regional growth, income convergence, institutions, geography, spatial effects.
    JEL: C21 O40 R11
    Date: 2009–11–15
  10. By: Virginie Coudert; Cyril Pouvelle
    Abstract: Strong credit growth rates in transition countries may result from a normal catching-up process in a framework of financial development. However, as elsewhere, they can also pertain to a “credit boom”, paving the way to future “credit crunches”. We try to disentangle these two types of situation for the central and eastern European countries (CEECs) by applying a number of methods. First, we consider the gap between current credit and its longterm trend and we find some signs of credit booms, in several CEECs in 2005-2007. Second, we assess the “normal” growth of credit with regard to fundamentals through econometric estimations. Credit growth is also shown to have been excessive in several countries just before the 2008-2009 financial crisis.
    Keywords: Credit boom; transition; financial development
    JEL: E30 E51 G21
    Date: 2009–12
  11. By: Fabio Cerina; F. Mureddu
    Abstract: We propose a New Economic Geography and Growth (NEGG) model able to reconcile theory with empirical evidence and current regional policy rules. By extending Baldwin et al. (2001) with an additional non-tradable services sector which benefits from localized intersectoral knowledge spillovers coming from the industrial sector, we show that aggregate growth and interregional equity do not necessarily conflict. In particular, we show that an equal distribution of industrial activities among regions is good for aggregate real growth when: 1) the importance of services in agents’ preferences 2) the spatial range of localized intertemporal knowledge spillovers and 3) the intensity of localized intersectoral knowledge are all large enough. Unlike other NEGG works, these results are consistent with the empirical evidence according to which the trade-off between aggregate growth and interregional equity loses relevance in more advanced stages of development. Moreover, our model provides a theoretical basis to EU and US regional policies which favour dispersion of industrial activities. Finally, an important by-product of our model is that we show that regional growth rates of real income always diverge when agglomeration takes place, being lower in the periphery. These results have strong policy implications as they suggest that concentrating industrial activities in only one region may be welfare – harming for both the less industrialized region and at the aggregate level.
    Keywords: Economic geography; efficiency-equity trade-off; intersectoral localized knowledge spillovers; non tradables; growth.
    JEL: O33 O41 R10
    Date: 2009
  12. By: Scopelliti, Alessandro Diego
    Abstract: The paper examines the relationship between competition and economic growth, in the theoretical framework described by endogenous growth models, but with a specific interest in the policy implications. In this perspective, the key issue in the debate can be presented as follows: do competition policies always create the best conditions for promoting innovation and growth? Or do they also produce some disincentives for the investment decisions in R&D, such to limit the development of industries with higher innovation? In order to answer these questions, the paper presents a survey of the theoretical literature on competition and growth and it discusses the main models of endogenous growth, both the ones based on horizontal innovation, such as Romer (1990) or Rivera-Batiz and Romer (1991), and the ones based on vertical innovation, like Aghion and Howitt (1992) or Aghion, Dewatripont and Rey (1997). In particular, specific attention is paid to the most recent models of Schumpeterian growth, which show the existence of a non-linear relationship between competition and growth, by considering either the initial degree of competition (Aghion, Blundell, Bloom, Griffith and Howitt, 2005) or the distance from the technological frontier. (Acemoglu, Aghion and Zilibotti, 2006). Finally, the review of the previous models of endogenous growth allows to draw some conclusions about further and possible developments of research on the relation between product market competition and economic growth.
    Keywords: expanding product varieties; increasing product quality; incentives for innovation; creative destruction; escape-competition effect; distance to frontier
    JEL: O41 O34 O33 O31
    Date: 2009–12–10
  13. By: Yamamura, Eiji; Shin, Inyong
    Abstract: This paper uses panel data from Japan to decompose productivity growth measured by the growth of output per labor unit into three components of efficiency improvement, capital accumulation and technological progress. It then examines their determinants through a dynamic panel model. In particular, this paper focuses on the question of how inequality, trust and humans affect the above components. The main findings derived from empirical estimations are: (1) Inequality impedes not only improvements in efficiency but also capital accumulation. (2) A degree of trust promotes efficiency improvements and capital accumulation at the same time. However, human capital merely enhances improvements in efficiency.
    Keywords: Heterogeneity; Inequality; Trust; Data envelopment analysis
    JEL: E25 O15 O40
    Date: 2010–01–15
  14. By: Pedro Rui Mazeda Gil (CEF.UP and Faculdade de Economia, Universidade do Porto); Paulo Brito (Instituto Superior de Economia e Gestão and UECE, Universidade Técnica de Lisboa); Óscar Afonso (CEF.UP and Faculdade de Economia, Universidade do Porto)
    Abstract: This paper develops a tournament model of horizontal and vertical R&D under a lab-equipment specification. A key feature is that the overall growth rate is endogenous, as the splitting of the growth rate between the intensive and the extensive margin is itself endogenous. This setup gives rise to strong inter-R&D composition effects, while making economic growth and firm dynamics closely related, both along the balanced-growth path and transition. The model hence offers a (qualitative) explanation for the negative or insignificant empirical correlation between aggregate R&D intensity and both firm size and economic growth, a well-known puzzle in the growth literature.
    Keywords: endogenous growth, vertical and horizontal R&D, firm dynamics, transitional dynamics
    JEL: O41 D43 L16
    Date: 2010–01
  15. By: van Ark, Bart (The Conference Board); Hao, Janet X. (The Conference Board); Corrado, Carol (The Conference Board); Hulten, Charles (The Conference Board)
    Abstract: This study describes the state of the art in the measurement of intangible capital and its contribution to economic growth, with a focus on an international comparison of intangible capital deepening among eleven advanced economies. By employing a broad measure of intangibles, including computerized information, innovative property and economic competencies, we find a relatively large impact on growth. Intangible capital explains about a quarter of labour-productivity in the US and larger countries of the EU. The continental West-European countries show a distinction between countries with significant contributions from intangible capital deepening and a group of laggards. Catching-up countries such as the Czech Republic, Greece and Slovakia show much larger contributions from tangible capital deepening than from intangibles, and also larger multi-factor productivity (MFP) growth rates related to the restructuring of those countries.
    Keywords: Economic growth; productivity; capital; innovation
    JEL: O30 O40
    Date: 2009–12–23
  16. By: Roy Cerqueti (University of Macerata); Raffaella Coppier (University of Macerata)
    Abstract: <p><font size="2" face="CMR10"><font size="2" face="CMR10"><p align="left">In this paper, we explore tax revenues in a regime of widespread corruption in a growth</p><p align="left">model. We develop a Ramsey model of economic growth with rival but non-excludable public good which is financed by taxes which can be evaded via corrupt tax inspector.</p><p align="left">We prove that the relationship between the tax rate and tax collection, in a dynamic</p><p align="left">framework, is not unique, but is different depending on the relevance of the shame effect.</p><p align="left">We show that growth rates - both of income and of tax revenues - decrease, as the tax rate</p><p align="left">increases, for all types of shame effect countries but they differ in how the growth rate</p><p align="left">decreases as the tax rate increases: the rate of decrease is higher in low shame countries</p><p align="left">than in high shame countries.</p></font></font></p>
    Date: 2009–12
  17. By: Mc Morrow, Kieran (European Commission); Röger, Werner (European Commission)
    Abstract: This paper reviews the empirical literature on rates of return on R&D and interprets the economic significance of these estimates using a semi-endogenous growth model with a calibrated knowledge production sector. We analyse how R&D subsidies, a reduction of entry barriers for start-ups and increasing high-skilled labour would contribute towards raising productivity and knowledge investment in the EU. The simulation results show that substantial efforts will have to be made if Europe wants to come close to achieving the Lisbon productivity and knowledge-investment targets. Achieving US standards in all three areas would reduce the productivity gap by about 50 percent. Improving the quality of tertiary education and increasing competition in non-manufacturing sectors would also help the EU to get to the productivity frontier.
    Keywords: Productivity differences; endogenous growth; R&D; DSGE models
    JEL: E10 O20 O30 O41
    Date: 2009–12–23
  18. By: Daisuke Tsuruta (National Graduate Institute for Policy Studies)
    Abstract: We investigate the financial resources used by small businesses in Japan during the period of recovery from a severe recession. Unlike large listed firms, small businesses cannot easily issue commercial debt or equity. Therefore, small businesses largely depend on trade credit and bank loans. Many previous studies argue that bank loans are cheaper than trade credit; so many firms (particularly unconstrained firms) use bank loans, especially in financially developed economies. However, the Japanese evidence does not support this view. First, small businesses with higher credit demand increase trade credit more during the period of the recovery from a severe recession. Second, creditworthy firms (for example, firms with more collateral assets) also increase trade credit to finance their growth opportunities. Third, firms in unstable industries increase trade credit more. This suggests that suppliers are able to offer credit, unlike banks, as they have a relative advantage in day-by-day monitoring.
    Date: 2010–01

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