nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒01‒30
23 papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Deficit, Seigniorage and the Growth Laffer Curve in developing countries By Hélène EHRHART; Alexandru MINEA; P. VILLIEU
  2. Workers' Remittances and Growth in MENA Labor Exporting Countries By Sufian Eltayeb Mohamed
  3. The Impact Of The Global Crisis on Canada: What Do Macro-Financial Linkages Tell Us? By Natalia Barrera; Rupa Duttagupta
  4. Un-balanced Economic Growth By Hing-Man Leung
  5. The Effects of Location and Sectoral Components of Growth By Asep Suryahadi; Daniel Suryadarma; Sudarno Sumarto
  6. Educational Thresholds and Economic Growth: Empirical Evidence from Brazilian States By Tulio A. Cravo; Elias Soukiazis
  7. Asia's Underachiever- Deep Constraints in Philippine Economic Growth By Roehlano M. Briones
  8. Growth and Structural Reforms: A New Assessment By Thierry Tressel; Martin Schindler; Lone Engbo Christiansen
  9. Growth, fluctuations and technology in the U.S. post-war economy By Jesús Rodríguez López
  10. The Gene of an Accelerating Industrial Society: Expansive Reproduction By Tai-Yoo Kim; Seunghyun Kim; Jongsu Lee
  11. “Lost Decade†in Translation:What Japan’s Crisis could Portend about Recovery from the Great Recession By Murtaza H. Syed; Kiichi Tokuoka; Kenneth Kang
  13. The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact By Pelin Berkmen; Robert Rennhack; James P Walsh; Gaston Gelos
  14. Pro-Poor Growth: Illusions of Marriage and Divorce? By Suryanarayana M H
  15. Financial Variables as Predictors of Real Output Growth By Anthony S. Tay
  16. Growth Accounting for a Follower-Economy in a World of Ideas- The Example of Singapore By Kong Weng Ho; Hian Teck Hoon
  17. The 2008 Financial Crisis and Taxation Policy By Thomas Hemmelgarn; Gaëtan Nicodème
  18. The relationship between output growth and inflation: Evidence from Turkey By Omay, Tolga; Aluftekin, Nilay; Karadagli, Ece C.
  19. Canada's Potential Growth: Another Victim of the Crisis? By Marcello M. Estevão; Evridiki Tsounta
  20. China: Does Government Health and Education Spending Boost Consumption? By Ray Brooks; Steven Barnett
  21. Green Revolutions and Miracle Economies - Agricultural Innovation, Trade and Growth By Brishti Guha
  22. Development and economic growth: the effectiveness of traditional policies By Gabriella Berloffa; Giuseppe Folloni; Ilaria Schnyder
  23. Endogenous Economic Growth through Connectivity By Zon, Adriaan van; Mupela, Evans

  1. By: Hélène EHRHART; Alexandru MINEA (Centre d'Etudes et de Recherches sur le Développement International); P. VILLIEU
    Abstract: The endogenous growth literature has established the existence of an inverted-U curve between taxes and economic growth, namely a Growth Laffer Curve (GLC). We develop a growth model with public investment as the engine of perpetual growth, and look for the effect of deficit, tax and money financing on economic growth. We study in particular the way fiscal and monetary policies (through deficit and seigniorage respectively) deform the GLC. An empirical section based on a panel of developing countries provides GMM-system estimators that support our theoretical conclusions.
    Keywords: GMM, Growth Laffer Curve, deficit, developing countries, panel data, seigniorage
    Date: 2009
  2. By: Sufian Eltayeb Mohamed (Aristotle University of Thessaloniki)
    Abstract: This paper presents an empirical examination of effects of workers’ remittance on economic growth in a sample of 7 remittance-receiving MENA countries. In order to empirically analyze the impact of remittances we estimate growth equations using a set of 7 MENA labor exporting countries during the period 1975-2006. A standard growth models are estimated using both fixed-effects and random effects models. The empirical results show the support of the fixed –effects method as the random effects model is rejected in statistical tests. The results show the support for the view that remittances have a positive impact on growth both directly and indirectly through their interactions with financial and institutional channels.
    Keywords: Remittances, Economic Growth, Panel Data, Fixed effects, MENA Countries
    JEL: C3 F3 F22
    Date: 2009
  3. By: Natalia Barrera; Rupa Duttagupta
    Abstract: This paper builds a Bayesian VAR estimation model of growth for Canada, by focusing specifically on the role of external and domestic financial indicators, including credit conditions. A variance decomposition shows that financial conditions explain one-third of the total variability in Canada's real GDP growth, although changes in U.S. real GDP growth still account for a larger share of volatility in Canadian growth. A macro-financial conditions index built from the VAR's impulse responses shows that U.S. real GDP growth and lending standards will increasingly bear on Canada's growth, implying that a normalization of the U.S. economic and financial conditions is key for a sustained recovery in Canada.
    Keywords: Bank credit , Canada , Credit controls , Economic forecasting , Economic growth , Economic models , External sector , Financial crisis , Global Financial Crisis 2008-2009 , Gross domestic product , Monetary policy , Spillovers ,
    Date: 2010–01–11
  4. By: Hing-Man Leung (Singapore Management University)
    Abstract: Since the elasticity of substitution between capital and labor is not always one, and since technical progress is not always Harrod-neutral, it is desirable to have an endogenous growth model that admits all sizes of the elasticity and all known technology modes. We derive an equation to do just that, fully describing the per capita income growth rate at all times. It shows a typical economy needing hundreds if not thousands of years to reach its long term growth rate, leading to the conclusion that even the short run may be very long indeed.
    Keywords: The elasticity of substitution, Non-Harrod-neutral technology, short-run growth
    JEL: O10 O11 O12 O40
    Date: 2010–01
  5. By: Asep Suryahadi; Daniel Suryadarma; Sudarno Sumarto (SMERU Research Institute)
    Abstract: This study extends the literature on the relationship between economic growth and poverty reduction by differentiating growth and poverty into their sectoral compositions and locations. We find that growth in the rural services sector reduces poverty in all sectors and locations. However, in terms of elasticity of poverty, urban services growth has the largest for all sectors except urban agriculture. We also find that rural agriculture growth strongly reduces poverty in the rural agriculture sector, the largest contributor to poverty in Indonesia. This implies that the most effective way to accelerate poverty reduction is by focusing on rural agriculture and urban services growth. In the long run, however, the focus should be shifted to achieving robust overall growth in the services sector.
    Keywords: economic growth, poverty, urban, rural, Indonesia
    JEL: I32 O18 O49
    Date: 2010–01
  6. By: Tulio A. Cravo (Loughborough University); Elias Soukiazis (University of Coimbra)
    Abstract: This paper examines the convergence process in Brazil over the period of 1985-2004, giving a special attention to the role of human capital as a conditioning factor to convergence. It examines how different levels of human capital influence growth in different regions of Brazil. Different measures of human capital are used in the growth regressions and the results show that they play a significant role in explaining the growth process. The evidence indicates that different levels of human capital have different impacts on the per capita income growth, depending on the level of development of the states. Lower levels of human capital explain better the convergence among the less developed states and higher levels of human capital are more adequate among the more developed states. The impact of the relative intermediate levels of human capital on growth is stronger in all samples, suggesting the existence of threshold effect in education.
    Keywords: conditional convergence, human capital thresholds, panel data
    JEL: O O1 O15
    Date: 2009
  7. By: Roehlano M. Briones (Philippine Institute for Development Studies)
    Abstract: Numerous studies have tried to explain the poor growth performance of the Philippines. This paper critically reviews related literature on constraints to long-run growth, as it applies to the Philippines. We evaluate several factors, namely- culture; corruption; and institutions. The last offers the most convincing explanation for mediocre growth. Hence, to raise the country’s growth trajectory, I recommend- sustained policy reform; less hand-wringing over Filipino culture and corruption; and above all, focused and sustained development of functional capitalistic institutions.
    Keywords: development, growth constraints, Philippines, institutions
    JEL: O11 O10
    Date: 2010–01
  8. By: Thierry Tressel; Martin Schindler; Lone Engbo Christiansen
    Abstract: This paper presents a simultaneous assessment of the relationship between economic performance and three groups of economic reforms: domestic finance, trade, and the capital account. Among these, domestic financial reforms, and trade reforms, are robustly associated with economic growth, but only in middle-income countries. In contrast, we do not find any systematic positive relationship between capital account liberalization and economic growth. Moreover, the effect of domestic financial reforms on economic growth in middle-income countries is explained by improvements in measured aggregate TFP growth, not by higher aggregate investment. We present evidence that variation in the quality of property rights helps explain the heterogeneity of the effectiveness of financial and trade reforms in developing countries. The evidence suggests that sufficiently developed property rights are a precondition for reaping the benefits of economic reform. Our results are robust to endogeneity bias and a number of alternative specifications.
    Keywords: Capital account , Cross country analysis , Economic growth , Economic models , Economic reforms , Fiscal policy , Globalization , Governance , International financial system , International trade , Trade liberalization ,
    Date: 2009–12–23
  9. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide)
    Abstract: This paper explores several issues concerning how technology affects growth and fluctuations during several U.S. postwar series. The nature of technology is divided into neutral progress and investment-specific progress. Accounting for several changes in the first and second order moments of these series (the slowdown of productivity in 1974, the moderation of 1984 and the resurgence in productivity after 1994), I find that the contribution of investment-specific progress to growth has increased over time. I also find that neutral progress is crucial in explaining the cyclical component of output (before and after 1984), contrary to results found in related literature. However, the shocks to investment-specific progress have played an increasing role in output and other macroeconomic variables. Finally, I conclude that moderation in the macroeconomic series can be associated with technology. In sum, the quality of technological processes affecting long run growth and fluctuations has changed over the past decades.
    Keywords: Productivity growth; Investment-specific technological change; Neutral technological change
    JEL: O3 O4
    Date: 2010–01
  10. By: Tai-Yoo Kim; Seunghyun Kim; Jongsu Lee (TEMEP, School of Industrial and Management Engineering College of Engineering, Seoul National University)
    Abstract: This study reviewed broad theories of economics and case studies to explain the phenomenon of accelerating economic growth in industrial society. Based on economic literature of economic growth theories, the causes of the acceleration of economic growth in industrial society are identified, and reference the genetic properties of economic growth represented as the virtuous cycle of expansive reproduction. Expansive reproduction is a unique growth structure of industrial society with an economy that expands through capital accumulation and technological innovation. The model suggested in this study is supported by major economic growth theories, such as Smith¡¯s theory of the division of labor, Marshall¡¯s theory of returns to scale, Chandler¡¯s theory of increasing returns, Myrdal¡¯s theory of cumulative causation, endogenous growth theory, and learning by doing, and also by empirical data, such as historical trends in per capita GDP and production efficiency. This study attempts to explain accurately economic growth in industrial society and forms a guide to the critical pathway leading to economic development, providing a theoretical background in determining industrial policies. This study also provides implications for advancing toward becoming a knowledge-based economy, an extension of postindustrial society.
    Keywords: Expansive reproduction, Accelerating industrial society, Growth, accelerations, Technical change, Economic growth, Exponential growth
    JEL: L16 O11 O47 O14
    Date: 2010–01
  11. By: Murtaza H. Syed; Kiichi Tokuoka; Kenneth Kang
    Abstract: Is the recovery from the global financial crisis now secured? A strikingly similar crisis that stalled Japan's growth miracle two decades ago could provide some clues. This paper explores the parallels and draws potential implications for the current global outlook and policies. Japan's experiences suggest four broad lessons. First, green shoots do not guarantee a recovery, implying a need to be cautious about the outlook. Second, financial fragilities can leave an economy vulnerable to adverse shocks and should be resolved for a durable recovery. Third, well-calibrated macroeconomic stimulus can facilitate this adjustment, but carries increasing costs. And fourth, while judging the best time to exit from policy support is difficult, clear medium-term plans may help.
    Keywords: Banking crisis , Banking sector , Central bank policy , Demand , Economic recovery , Financial crisis , Fiscal policy , Global Financial Crisis 2008-2009 , International financial system , Japan , Liquidity management , Monetary policy , Private sector , Public investment ,
    Date: 2009–12–22
  12. By: Thulin, Per (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper investigates the relationship between inter-firm labor mobility and regional productivity growth. Previous studies have shown that density is positively correlated with growth. I claim that it is not density in itself, but rather the attributes associated with it that drives economic growth. One such attribute is the increased possibility for labor mobility and knowledge diffusion that follows when firms and individuals locate in close proximity to each other. This hypothesis is tested using a matched employer-employee dataset where regional labor mobility is instrumented with density. The result shows that labor mobility increases regional growth rates.
    Keywords: Labor mobility; regional growth; agglomeration economies
    JEL: J62 R11 R23
    Date: 2009–12–18
  13. By: Pelin Berkmen; Robert Rennhack; James P Walsh; Gaston Gelos
    Abstract: We provide one of the first attempts at explaining the differences in the crisis impact across developing countries and emerging markets. Using cross-country regressions to explain the factors driving growth forecast revisions after the eruption of the global crisis, we find that a small set of variables explain a large share of the variation in growth revisions. Countries with more leveraged domestic financial systems and more rapid credit growth tended to suffer larger downward revisions to their growth outlooks. For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with countries exporting more advanced manufacturing goods more affected than those exporting food. Exchange-rate flexibility clearly helped in buffering the impact of the shock. There is also some -weaker-evidence that countries with a stronger fiscal position prior to the crisis were hit less severely. We find little evidence for the importance of other policy variables.
    Keywords: Credit expansion , Cross country analysis , Developing countries , Economic forecasting , Economic growth , Emerging markets , Financial crisis , Financial systems , Fiscal policy , Flexible exchange rates , Global Financial Crisis 2008-2009 , Trade ,
    Date: 2009–12–18
  14. By: Suryanarayana M H
    Abstract: This note seeks to show that the debate on ‘Pro-Poor Growth’ is sterile and largely academic with few policy insights.
    Keywords: growth, pro-poor growth, policy, poverty reductionSocio-economic dimension, economic policy, marriage, divorce, inequality, opportunity cost
    Date: 2010
  15. By: Anthony S. Tay (Singapore Management University)
    Abstract: We investigate two methods for using daily stock returns to forecast, and update forecasts of, quarterly real output growth. Both methods aggregate daily returns in some manner to form a single stock market variable. We consider (i) augmenting the quarterly AR(1) model for real output growth with daily returns using a nonparametric Mixed Data Sampling (MIDAS) setting, and (ii) augmenting the quarterly AR(1) model with the most recent r -day returns as an additional predictor. We discover that adding low frequency stock returns (up to annual returns, depending on forecast horizon) to a quarterly AR(1) model improves forecasts of output growth.
    Keywords: Forecasting, Mixed Frequencies, Functional linear regression
    Date: 2010–01
  16. By: Kong Weng Ho; Hian Teck Hoon (Singapore Management University)
    Abstract: In this paper, we take another approach to accounting for the sources of Singapore’s economic growth by being explicit about the channels through which Singapore, as a technological follower, benefits from international R&D spillovers. Taking into account the channels through which technology developed in the G5 countries diffuses to technological followers, we show that 57.5 percent of Singapore’s real GDP per worker growth rate over the 1970-2002 period is due to multifactor productivity growth. In particular, about 52 percent of the growth is accounted for by an increase in the effectiveness of accessing ideas developed by the technology leaders through improvement in our educational quality and increase in machinery imports and foreign direct investment from the G5 countries. We also find that capital accumulation that takes the form of imports of machinery as well as foreign direct investment from the G5 countries enhances the effectiveness of technology transfer thus raising the rate of return to capital. Compared to the rate of return to capital inferred from the traditional Solow growth model with purely exogenous technological progress of 10.8 percent, taking into account the technology transfer channel raises the implied rate of return to 13 percent.
    Keywords: technological diffusion, idea production function, multifactor productivity growth
    JEL: F43 O33 O47
    Date: 2010–01
  17. By: Thomas Hemmelgarn (European Commission.); Gaëtan Nicodème (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, ECARES, Université Libre de Bruxelles, Brussels, European Commission, CEPR and CESifo.)
    Abstract: The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, leading to deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between tax policy and the financial crisis. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
    Keywords: financial crisis, tax policy, taxation, fiscal stimulus, financial transaction tax, property tax.
    JEL: E62 F21 F30 G10 H20 H30 H50 H60
    Date: 2010–01
  18. By: Omay, Tolga; Aluftekin, Nilay; Karadagli, Ece C.
    Abstract: In this study, a bi-variate Generalized Autoregressive Conditional Heteroscedasticty model is used in order to investigate the Granger causality relationships between output growth, inflation rate and their uncertainties. Our test results show that the existence of Granger-causality is observed from nominal uncertainty to inflation, from nominal uncertainty to real uncertainty, from output growth to real uncertainty, from output growth to nominal uncertainty and from inflation to nominal uncertainty. These findings prove that theoretical predictions of Cuikerman and Meltzer (1986), Okun (1971) and Friedman (1977) are valid for the period 1986:6-2007:1 for Turkey. On the other hand, ‘Short-run Phillips Curve’ and ‘Taylor Effect’ have proven empirically to be invalid for Turkey for this sample period. Moreover, we deduce that Turkish inflation is affected by the output growth through the nominal uncertainty channel.
    Keywords: Inflation; output growth; uncertainty; Granger-Causality; bi-variate GARCH.
    JEL: C32 E31 E00
    Date: 2009–09–10
  19. By: Marcello M. Estevão; Evridiki Tsounta
    Abstract: This study investigates the impact of the current financial crisis on Canada's potential GDP growth. Using a simple accounting framework to decompose trend GDP growth into changes in capital, labor services and total factor productivity, we find a sizeable drop in Canadian potential growth in the short term. The estimated decline of about 1 percentage point originates from a sharply decelerating capital stock accumulation (as investment has dropped steeply) and a rising long-term unemployment rate (which would raise equilibrium unemployment rates). However, over the medium term, we expect Canada's potential GDP growth to gradually rise to around 2 percent, below the pre-crisis growth rate, mostly reflecting the effects of population aging and a secular decline in average working hours.
    Date: 2010–01–13
  20. By: Ray Brooks; Steven Barnett
    Abstract: Consumption in China is unusually low and has continued to decline as a share of GDP over the past decade. A key policy question is how to reverse this trend, and rebalance growth away from reliance on exports and investment and toward consumption. This paper investigates whether the sizable increase in government social spending in recent years lowered precautionary saving and increased consumption. The main findings are that spending on health, but not education, had an impact on household behavior. The impact, moreover, is large. A one yuan increase in government health spending is associated with a two yuan increase in urban household consumption.
    Date: 2010–01–15
  21. By: Brishti Guha (Singapore Management University)
    Abstract: The purpose of this paper is to develop a simple model of an economy in which growth is driven by a combination of exogenous technical change in agriculture as well as by a rising world demand for labor-intensive manufactured exports. We explore the relative roles of agricultural innovation and rising export demand in a model with two traded industrial goods and a non-traded agricultural good, food. When the non-traded sector uses a specific factor, we show that technical change in agriculture may be the key to sustained factor accumulation in industry, in particular driving intersectoral labor migration. A key assumption is a less than unitary price elasticity of demand for food. Our results could form a crucial link in capturing the story of labor-abundant economies which experienced structural transformation and growth through labor-intensive manufactured exports, without prior technology breakthroughs in industry. They contribute to explaining the massive growth in factor accumulation which shows up in some growth accounting studies - they may also imply that some of the contribution of “technical progress� is mistakenly attributed solely to factor accumulation.
    Keywords: Structural change, agricultural productivity, labor migration, terms of trade
    JEL: O3 O4 F1
    Date: 2010–01
  22. By: Gabriella Berloffa; Giuseppe Folloni; Ilaria Schnyder
    Abstract: The empirical evidence of low effectiveness for growth of investment in physical and human capital policies based on international aid is analyzed and discussed (§ 1 and 2). Reasons are linked both to limits of analytical and econometric methods (§ 4) and the existence of strong complementarities between different dimensions of macroeconomic, social and institutional context (§ 3). We critically discuss the new strategies proposed to gain effectiveness in development projects and policies.
    Keywords: Aid Effectiveness, Growth Policies, Institutions, Development
    Date: 2009
  23. By: Zon, Adriaan van (UNU-MERIT, and Maastricht University); Mupela, Evans (UNU-MERIT)
    Abstract: In this paper we show the benefits of regional connectivity and specialization to growth. Starting with one region we show how welfare measured by utility per head increases as the number of connected regions increase. We assume a common connectivity infrastructure implemented by satellite, through which the 'Great Connector' (GC) is able to add new regions to the pool of connected regions by taking a tax form those already connected. We find that increasing production costs leads to faster transitions towards the steady state whereas increasing transportation and communication costs tends to lengthen the transition. The results point to reductions in transportation and communication costs in particular as a suitable vehicle to speed up growth. The results also show a strong positive effect of reductions in the cost of making new connections. This has a significant impact on both the steady state growth rate and on transitional growth, while significantly reducing the transition period.
    Keywords: Connectivity, Satellites, Growth, Specialization, Networks
    JEL: O25 O43 O47 F15 F43
    Date: 2010

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