nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒03‒13
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Can Remittances Spur Economic Growth and Development? Evidence from Latin American Countries (LACs). By Bichaka Fayissa; Christian Nsiah
  2. Does FDI intensify Economic Growth? Empirics from Bangladesh. By Ahamad, Mazbahul Golam; Tanin, Fahian; Ahmed, Zahir Uddin
  3. How does political instability affect economic growth? By Ari Aisen; Francisco José Veiga
  4. Technical Change and Total Factor Productivity Growth: The Case of Chinese Provinces By Almas Heshmati; Subal C. Kumbhakar
  5. Neoclassical Growth Theory and Heterodox Growth Theory: Opportunities For and Obstacles To Greater Engagement By Mark Setterfield
  6. Innovation, Public Capital, and Growth By Pierre-Richard Agénor; Kyriakos C. Neanidis
  7. Remittances and Domestic Investment in Developing Countries: An Analysis of the Role of Financial Sector Development By Laurent Gheeraert; Ritha Sukadi; Daniel Traça
  8. Infrastructure and productivity in Latin America: Is there a relationship in the long run? By Teles, Vladimir Kuhl; Mussolini, Caio Cesar
  9. The Solaria Syndrome: Social capital in a growing hypertechnological economy By Antoci Angelo; Sabatini Fabio; Sodini Mauro
  10. The Dynamics of Knowledge Diversity and Economic Growth By Berliant, Marcus; Fujita, Masahisa
  11. The Financial Crisis: One Year Later By Robert Amzallag
  12. Dynamic inter-relationship between trade, economic growth and tourism in Malaysia By Sarmidi, Tamat; Salleh, Norlida H
  13. The Financial Crisis: A Wake-Up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies? By Winkler, Adalbert
  14. Self-fulfilling liquidity dry-ups By Frédéric Malherbe

  1. By: Bichaka Fayissa; Christian Nsiah
    Abstract: For the last five decades, there have been heated debates on the sources of economic growth in developing economies. The perceived factors of economic growth have ranged from surplus labor to investment in human and physical capital, transfer of technological change, overseas development assistance, flow of private capital, increasing returns from investment in new ideas and research and development. The impacts of the above listed traditional sources of economic growth have been well documented in literature. Researchers have also considered the importance of institutional factors such as the role of political freedom, political instability, voice and accountability on economic growth and development. Despite the increased size of remittances in the total international capital flows, however, the relationship between remittances and economic growth has not been adequately studied. This study explores the aggregate impact of remittances on the economic growth of 18 Latin American Countries within the conventional neoclassical growth framework using an unbalanced panel data spanning from 1980 to 2005. We find that remittances have a positive and significant effect on the growth of Latin American Countries where the financial systems are less developed by providing an alternative way to finance investment and helping overcome liquidity constraints.
    Keywords: Workers’ Remittances, Economic Growth, Panel Data, Arellano-Bond, Latin American Countries
    JEL: E21 F21 G22 J61 O16
    Date: 2010–03
  2. By: Ahamad, Mazbahul Golam; Tanin, Fahian; Ahmed, Zahir Uddin
    Abstract: Inward FDI to the middle-income countries has the evidence as a major stimulus to the economic growth; conventionally at export-oriented manufacturing sector. In point of fact, basic macro fundamentals like as growth of gross domestic capital formation, foreign reserve, infrastructure etc. accelerates the FDI inflows. This study reviews the long-run trend on the time scale of FDI to Bangladesh over the period 1975- 2006 and major factors determining foreign companies' decisions to invest, in associated with economic growth. Contents of the paper describe the theoretical development and extensive literature review to find out the appropriate variables to deter the foreign direct investment from time series data. On the basis of intricate link between foreign direct investment and growth, all explained determinants enhance the facilitation, turnover, and return in FDI concentrated sectors that promote long-term sustainable growth with specific shortcomings, directly or indirectly, in our labor-intensive economic activity. Reduced government’s ineffectiveness along with supporting policy framework makes Bangladesh as an attractive destination of FDI, that has a positive spillover and significant impacts affect over time through dynamic effects on economic growth.
    Keywords: FDI; Economic Growth; Bangladesh
    JEL: O16 F43
    Date: 2010–02–01
  3. By: Ari Aisen (Central Bank of Chile and International Monetary Fund); Francisco José Veiga (Universidade do Minho - NIPE)
    Abstract: The purpose of this paper is to empirically determine the effects of political instability on economic growth. Using the system-GMM estimator for linear dynamic panel data models on a sample covering up to 169 countries, and 5-year periods from 1960 to 2004, we find that higher degrees of political instability are associated with lower growth rates of GDP per capita. Regarding the channels of transmission, we find that political instability adversely affects growth by lowering the rates of productivity growth and, to a smaller degree, physical and human capital accumulation. Finally, economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect.
    Keywords: Economic growth, political instability, growth accounting, productivity
    JEL: O43 O47
    Date: 2010
  4. By: Almas Heshmati; Subal C. Kumbhakar (TEMEP, School of Industrial and Management Engineering College of Engineering, Seoul National University)
    Abstract: In the literature technical change is mostly assumed to be exogenous and specified as a function of time. However, some exogenous external factors other than time can also affect technical change. In this paper we model technical change via time trend (purely external non-economic) as well as other exogenous (external economic) factors (technology shifters). We define technology index based on the external economic factors which are indicators of ¡®technology¡¯. Thus our definition of production function is amended to accommodate everal technology shifters which are not separable from the traditional inputs. That is, these technology shifters allow for non-neutral shift in the production function. In doing so we are able to decompose technical change (a component of TFP change) into two parts. One part is driven by time (manna from heaven) and the other part is related to producer specific external economic factors. These exogenous technology shifters are aggregated (via hedonic aggregator functions) into several groups (technology indices) for parsimonious parametric specification. The empirical model uses panel data on Chinese provinces. We identify a number of key technology shifters and their effect on technical change and TFP growth of provinces.
    Keywords: technical change, total factor productivity growth, technology indicator, technology shifter, Chinese provinces
    JEL: C33 C43 D24 O18 O47
    Date: 2010–02
  5. By: Mark Setterfield (Department of Economics, Trinity College)
    Abstract: This paper explores the possibilities for and likely impediments to greater engagement between neoclassical and heterodox growth theorists. Simple structural models are used to identify the essential “mechanics” of the growth process in both the neoclassical and heterodox traditions, and these are shown to point to important areas of theoretical overlap and even observational equivalence. It is argued, however, that the resultant opportunities for greater engagement between growth theorists are tempered by a number of obstacles, that are methodological, rhetorical and sociological in nature.
    Keywords: Neoclassical growth theory, heterodox growth theory, endogenous growth
    JEL: O40 E12 E13
    Date: 2009–12
  6. By: Pierre-Richard Agénor; Kyriakos C. Neanidis
    Abstract: This paper studies interactions between public capital, human capital, and innovation in a three-period OLG model of endogenous growth. Public capital affects growth not only through productivity, but also through the diffusion rate of new technologies, the capacity to innovate, and the ability to produce human capital. Trade-offs involved in the allocation of public spending to R&D subsidies and nonlinearities are discussed. Panel data regressions based on a sample of 38 industrial and developing countries are used to test, using a variety of estimation techniques and variable definitions, the implications of the model over the period 1981-2008. Results show that higher innovation performance promotes growth directly, whereas public capital (both quantity and quality) has both direct and indirect effects on growth by promoting human capital accumulation and raising the capacity to innovate. The latter effect appears to operate in a nonlinear fashion, in line with “critical mass” models of infrastructure. Taking proper account of the government’s budget constraint, our estimates also suggest that public spending on R&D contributes to growth by fostering innovation.
    Date: 2010
  7. By: Laurent Gheeraert (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels.); Ritha Sukadi (Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels.); Daniel Traça (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and Universidade Nova de Lisboa)
    Abstract: This paper addresses the relationship between remittances and home country investment in developing countries. It highlights, through both a theoretical model and an empirical analysis, the role of financial sector development (FSD) in the impact of remittances on home country investment. The key contribution of the paper is to show that different transaction costs traditionally associated with the FSD, namely 'Cost of Bank Depositing' and 'Cost of External Finance', have conflicting effects on the marginal impact of remitances on investment. Our stylized model, which addresses the specificities of remittance flows through the loanable funds market, yields several intuitive results. First, the marginal impacts of remittances on bank-deposits and formal investment are positive. Second, both marginal impacts increase when the Cost of Bank Depositing declines. Third, a decrease in Cost of External Finance lowers the marginal impact on formal investment, and does not affect the marginal impact on bank deposits. Hence, since FSD lowers both transaction costs, it has an ambiguous effect on the marginal impact on investment. The empirical analysis on a sample of 100 developing countries, using both cross-section and panel-data methodologies, confirms our model's predictions.
    Keywords: remittances, investment, growth, financial sector development, transaction cost, openness
    JEL: F24 O16 G2
    Date: 2010–02
  8. By: Teles, Vladimir Kuhl; Mussolini, Caio Cesar
    Abstract: This article analyses the relationship between infrastructure and total factor productivity (TFP) in the four major Latin American economies: Argentina, Brazil, Chile and Mexico. We hypothesise that an increase in infrastructure has an indirect effect on long-term economic growth by raising productivity. To assess this theory, we use the traditional Johansen methodology for testing the cointegration between TFP and physical measures of infrastructure stock, such as energy, roads, and telephones. We then apply the Lütkepohl, Saikkonen and Trenkler Test, which considers a possible level shift in the series and has better small sample properties, to the same data set and compare the two tests. The results do not support a robust long-term relationship between the series; we do not find strong evidence that cuts in infrastructure investment in some Latin American countries were the main reason for the fall in TFP during the 1970s and 1980s.
    Date: 2010–02–22
  9. By: Antoci Angelo; Sabatini Fabio; Sodini Mauro
    Abstract: We develop a dynamic model to analyze the sources and the evolution of social participation and social capital in a growing economy characterized by exogenous technical progress. Starting from the assumption that the well-being of agents basically depends on material and relational goods, we show that the best-case scenarios hold when technology and social capital both support just one of the two productions at the expenses of the other. However, trajectories are possible where technology and social interaction balance one another in fostering the growth of both the social and the private sector of the economy. Along such tracks, technology may play a crucial role in supporting a “socially sustainable” economic growth.
    Keywords: Technology, economic growth, relational goods, social participation, social capital
    JEL: O33 J22 O41 Z13
    Date: 2010–02
  10. By: Berliant, Marcus; Fujita, Masahisa
    Abstract: How is long run economic growth related to the endogenous diversity of knowledge? We formulate and study a microeconomic model of knowledge creation, through the interactions among a group of heterogeneous R & D workers, embedded in a growth model to address this question. In contrast with the traditional literature, in our model the composition of the research work force in terms of knowledge heterogeneity matters, in addition to its size, in determining the production of new knowledge. Moreover, the heterogeneity of the work force is endogenous. Income to these workers accrues as patent income, whereas transmission of newly created knowledge to all such workers occurs due to public transmission of patent information. Knowledge in common is required for communication, but differential knowledge is useful to bring originality to the endeavor. Whether or not the system reaches the most productive state depends on the strength of the public knowledge transmission technology. Equilibrium paths are found analytically. Long run economic growth is positively related to both the effectiveness of pairwise R & D worker interaction and to the effectiveness of public knowledge transmission.
    Keywords: knowledge creation; knowledge externalities; microfoundations of endogenous growth; knowledge diversity and growth
    JEL: D90 D83 O31
    Date: 2010–02–27
  11. By: Robert Amzallag
    Abstract: This paper is meant to provide a fresh retrospective on the events shaping the evolution of the financial crisis and economic recession since last year. While continuing and updating last year’s analysis, the author offers an assessment of the three potential scenarios through which the crisis could have evolved. This update on the crisis derives from a reflection, sometimes a criticism, of the key players' role in both the causes and the solutions. Those are the governments, central banks, regulators, financial institutions, and their directors. It is from this retrospective analysis that the author can conclude by sharing his impression regarding future developments of the economy and the financial sector. <P>Cette publication se veut un retour actualisé sur les événements de la dernière année concernant l’évolution de la crise financière et de la récession économique. Poursuivant et mettant à jour l’analyse d’il y a un an, l’auteur offre une évaluation des trois scénarios potentiels qu’aurait pu suivre la crise. Ce retour sur la crise se fait à travers une réflexion, et parfois une critique, concernant le rôle des joueurs clés qui sont impliqués autant dans les causes que dans les solutions. Il s’agit des gouvernements, des banques centrales, des autorités de régulation, des institutions financières ainsi que des dirigeants de celles-ci. C’est à partir de cette analyse rétrospective que l’auteur peut conclure en partageant son impression quant aux développements futurs de l’économie et du secteur financier
    Keywords: financial crisis, recession, government intervention, financial regulation, financial history, financial forecasting , crise financière, récession, intervention gouvernementale, régulation financière, histoire financière, prévision financière
    Date: 2010–03–01
  12. By: Sarmidi, Tamat; Salleh, Norlida H
    Abstract: This study aims to test a hypothesis that postulate a positive inter-relationship between international flows of tourist, trade and economic growth. Although tourism is one of the major components in the trade of services, and it has been certified by large number of literatures on the strong correlation between tourism industry and economic development, yet not much is known on the dynamic inter-relationship between these three variables. Closing-up this gaping hole, this study employs the cointegration tests under autoregressive distributed lag (ARDL) structure to investigate a dynamic inter-relationship between economic development, total trade (import and export) and number of tourist arrival for Malaysia and her major tourism partners ((ASEAN countries) . The estimated result based on the long run time series behavior for number of tourist arrival, volume of total trade and economic development’s indicator shows that these three variables are moved in tandem. Interestingly, in the analysis of short run behavior, we find that number of tourist arrival has significantly Granger caused total trade flows at least for some countries. At the same time, in the short-run, we find that both growth in total trade (export and import) and international tourists’ arrival to Malaysia have uni-directionally Granger caused real income growth and there is statistical evidence for international trade to lead tourist arrival.
    Keywords: economic growth; trade; tourism; cointegration; and Malaysia
    JEL: F00 F41 A10
    Date: 2010–03–01
  13. By: Winkler, Adalbert (Asian Development Bank Institute)
    Abstract: How much can regional monitoring of financial markets and coordination of financial sector policies contribute to preventing and mitigating financial crises? This paper reviews and compares the experiences of Europe and Asia, which have taken different routes and have achieved different levels of regional financial integration. The analysis suggests that the harmonization and coordination of regulation and supervision, with a strong focus on maturity and currency mismatch problems, would constitute an important step toward mitigating the risk of crisis. However, regional monitoring and coordination will remain difficult as long as lender-of-last-resort activities and fiscal support packages are organized on a national level. Against this background, the crisis is a wake-up call for further progress on monetary integration in Asia along the lines of the reformed Chiang Mai Initiative. In Europe, the crisis reveals the need to establish a sustainable regulatory and supervisory structure that properly defines and reflects the responsibilities of regional and national authorities in crisis management, including its fiscal
    Keywords: regional financial integration; european lessons; asian financial policies; financial crisis; financial markets; financial sector policies
    JEL: F15 F33 F36 G38
    Date: 2010–02–24
  14. By: Frédéric Malherbe (National Bank of Belgium, Research Department; Université Libre de Bruxelles, ECARES)
    Abstract: Secondary markets for long-term assets might be illiquid due to adverse selection. In a model in which moral hazard is confined to project initiation, I find that: (1) when agents expect a liquidity dry-up on such markets, they optimally choose to self-insure through the hoarding of non-productive but liquid assets; (2) such a response has negative externalities as it reduces ex-post market participation, which worsens adverse selection and dries up market liquidity; (3) liquidity dry-ups are Pareto inefficient equilibria; (4) the Government can rule them out. Additionally, when agents face idiosyncratic, privately known, illiquidity shocks, I show that: (5) it increases market liquidity; (6) illiquid agents are better-off when they can credibly disclose their liquidity position, but transparency has an ambiguous effect on risk-sharing possibilities.
    Keywords: Liquidity, Liquidity Dry-ups, Financial Crises, Hoarding, Adverse Selection, Self-insurance
    JEL: E44 G11
    Date: 2010–03

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