nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒03‒28
nineteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Urban concentration and economic growth: checking for specific regional effects By Pholo Bala, Alain
  2. The tradeoff between growth and redistribution: ELIE in an overlapping generations model By de la CROIX, David; LUBRANO, Michel
  3. Optimal education and pensions in an endogenous growth model By DEL REY, Elena; LOPEZ-GARCIA, Miguel
  4. The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back? By Yanliang Miao; Andrew Berg
  5. Growth and Capital Flows with Risky Entrepreneurship By Damiano Sandri
  6. Bank Credit during the 2008 Financial Crisis: A Cross-Country Comparison By Ari Aisen; Michael Franken
  7. Taking Monetary Aggregates Seriously By Pierre Siklos
  8. Fiscal Decentralization and Economic Growth in Central and Eastern Europe. By Andrés Rodríguez-Pose; Anne Krøijer
  9. Government Spending in a New Keynesian Endogenous Growth Model By Kühn Stefan; Muysken Joan; Veen Tom van
  10. Do Output Contractions Trigger Democratic Change? By Burke, Paul J.; Leigh, Andrew
  11. ICT Equipment Investment and Growth in Low- and Lower-Middle-Income Countries By Markus Haacker
  12. The Global Financial Crisis and Workers' Remittances to Africa: What's the Damage? By Anjali Garg; Adolfo Barajas; Ralph Chami; Connel Fullenkamp
  13. Spillovers to Central America in Light of the Crisis: What a Difference a Year Makes By Andrew Swiston
  14. Can education be good for both growth and the environment? By BRECHET, Thierry; PRIEUR, Fabien
  15. Financial Shocks and TFP Growth By Marcello M. Estevão; Tiago Severo
  16. Credit risk model for the Estonian banking sector By Rasmus Kattai
  17. Responding to Banking Crises: Lessons from Cross-Country Evidence By Giang Ho; Enrica Detragiache
  18. Non-Compete Covenants: Incentives to Innovate or Impediments to Growth By Sampsa Samila; Olav Sorenson
  19. The global financial crisis and public finances in the New EU Countries from Central and Eastern Europe By Karsten Staehr

  1. By: Pholo Bala, Alain (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Keywords: urban primacy, economic growth, missing data, imputation, semiparametric estimation
    JEL: C14 C30 C49 R15
    Date: 2009–05–01
  2. By: de la CROIX, David (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); LUBRANO, Michel
    Keywords: education, growth, redistribution, Kolm
    JEL: O41 H20 I38
    Date: 2009–03–01
  3. By: DEL REY, Elena (Universitat de Girona, Spain); LOPEZ-GARCIA, Miguel (Universitat Autonoma de Barcelona, Spain)
    Abstract: It is well known that, in OLG economies with life-cycle saving and exogenous growth, competitive equilibria will in general fail to achieve optimality and may even be dynamically inefficient. This is a consequence of individuals accumulating amounts of physical capital that differ from the level which would maximize welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, to wit: individuals may not choose the correct amount of education investment. However, the Golden Rule concept, widely used in exogenous growth frameworks, has not found its way into endogenous growth models. In this paper, we propose to recover the Golden Rule of physical and also human capital accumulation. The optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments is also characterized. It is shown that it involves positive pensions and negative education subsidies (i.e., taxes)
    Keywords: endogenous growth, human capital, intergenerational transfers, education policy
    JEL: D90 H21 H52 H55
    Date: 2009–12–01
  4. By: Yanliang Miao; Andrew Berg
    Abstract: There is good reason and much evidence to suggest that the real exchange rate matters for economic growth, but why? The "Washington Consensus" (WC) view holds that real exchange rate misalignment implies macroeconomic imbalances that are themselves bad for growth. In contrast, Rodrik (2008) argues that undervaluation relative to purchasing power parity is good for growth because it promotes the otherwise inefficiently small tradable sector. Our main result is that WC and the Rodrik views of the role of misalignment in growth are observationally equivalent for the main growth regressions he reports. There is an identification problem: Determinants of misalignment are also likely to be independent drivers of growth, and these types of growth regressions are hard-pressed to disentangle the different channels. However, we confirm that not only are overvaluations bad but undervaluations are also good for growth, a result squarely consistent with the Rodrik story but one that requires some gymnastics from the WC viewpoint.
    Keywords: Economic growth , Economic models , Purchasing power parity , Real effective exchange rates ,
    Date: 2010–02–19
  5. By: Damiano Sandri
    Abstract: This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows.
    Keywords: Capital flows , Capital outflows , Economic growth , Economic models , Financial risk , Private investment , Private savings , Private sector ,
    Date: 2010–02–18
  6. By: Ari Aisen; Michael Franken
    Abstract: This paper empirically estimates the main determinants of bank credit growth during the 2008 financial crisis. Using a sample covering over 80 countries, this paper finds that larger bank credit booms prior to the crisis and lower GDP growth of trading partners are among the most important determinants of the post-crisis bank credit slowdown. Structural variables such as financial depth and integration were also relevant. Finally, countercyclical monetary policy and liquidity played a critical role in alleviating bank credit contraction after the 2008 financial crisis, suggesting that countries should pursue appropriate institutional and macroeconomic frameworks conducive to countercyclical monetary policies.
    Keywords: Bank credit , Banking systems , Business cycles , Credit expansion , Cross country analysis , Economic growth , Economic integration , Economic models , Financial crisis , Global Financial Crisis 2008-2009 , Liquidity , Monetary policy ,
    Date: 2010–02–25
  7. By: Pierre Siklos (Wilfrid Laurier University)
    Abstract: In response to the recent financial crisis, central banks around the world, including the Bank of Canada, have provided markets with extraordinary levels of liquidity. As the economic recovery takes hold, the question arises of what the increased liquidity, through higher money growth, portends for the near future. The supply of and demand for money carries information on the outlook for inflation and economic growth. Current evidence suggests a rebound in economic growth and inflationary pressure unless the Bank begins to rein in money growth. The Bank of Canada should provide some guidance on its thinking on the behaviour of monetary and credit aggregates and what it entails for inflation and economic growth.
    Keywords: Monitary Policy, Bank of Canada, monetary aggregates, money gap estimate, central bank policy
    JEL: E58 E52 E51
    Date: 2010–03
  8. By: Andrés Rodríguez-Pose; Anne Krøijer
    Abstract: The majority of the literature on fiscal decentralization has tended to stress that the greater capacity of decentralized governments to tailor policies to local preferences and to be innovative in the provision of policies and public services, the greater the potential for economic efficiency and growth. There is, however, little empirical evidence to substantiate this claim. In this paper we examine, using a panel data approach with dynamic effects, the relationship between the level of fiscal decentralization and economic growth rates across 16 Central and Eastern European countries over the 1990-2004 period. Our findings suggest that, contrary to the majority view, there is a significant negative relationship between two out of three fiscal decentralization indicators included in the analysis and economic growth. However, the use of different time lags allows us to nuance this negative view and show that long term effects vary depending on the type of decentralization undertaken in each of the countries considered. While expenditure at and transfers to subnational tiers of government are negatively correlated with economic growth, taxes assigned at the subnational level evolve from having a significantly negative to a significantly positive correlation with the national growth rate. This supports the view that subnational governments with their own revenue source respond better to local demands and promote greater economic efficiency.
    Keywords: Fiscal decentralization, economic growth, efficiency, devolution, Central and Eastern Europe
    Date: 2010–01
  9. By: Kühn Stefan; Muysken Joan; Veen Tom van (METEOR)
    Abstract: Standard New Keynesian models cannot generate the widely observed result that private consumption is crowded in by government spending. We use a New Keynesian endogenous growth model with endogenous labour supply to analyse this phenomenon. The presence of small direct productivity effects of government spending as well as Calvo pricing and a Taylor monetary policy rule significantly enhance the growth rate effect of temporary government spending. The resulting model can explain the consumption crowding-in phenomenon for realistic parameter values. We also find plausible values for the government spending multiplier.
    Keywords: public economics ;
    Date: 2010
  10. By: Burke, Paul J. (Australian National University); Leigh, Andrew (Australian National University)
    Abstract: Does faster economic growth increase pressure for democratic change, or reduce it? Using data for 154 countries for the period 1963-2007, we examine the short-run relationship between economic growth and moves toward and away from greater democracy. To address the potential endogeneity of economic growth, we use variation in precipitation, temperatures, and commodity prices as instruments for a country’s rate of economic growth. Our results indicate that more rapid economic growth reduces the short-run likelihood of institutional change toward democracy. Output contractions due to adverse weather shocks appear to have a particularly important impact on the timing of democratic change.
    Keywords: economic growth, democratization, weather, commodity prices
    JEL: D72 N40 O17
    Date: 2010–03
  11. By: Markus Haacker
    Abstract: While production of ICT equipment plays a subordinate role for economic growth in most of these countries, they do benefit from capital deepening arising from falling prices of ICT equipment. Adapting established growth accounting approaches to the data environment of low-income countries, we quantify the growth impacts of absorption of ICT equipment, finding that ICT-related capital deepening contributed 0.2 percentage points to growth in low-income countries, and 0.3 percentage points in low-middle-income countries. The latter is about half the level typically found for industrialized countries.
    Date: 2010–03–17
  12. By: Anjali Garg; Adolfo Barajas; Ralph Chami; Connel Fullenkamp
    Abstract: Using data on the distribution of migrants from Africa, GDP growth forecasts for host countries, and after estimating remittance multipliers in recipient countries, this paper estimates the impact of the global economic crisis on African GDP via the remittance channel during 2009-2010. It forecasts remittance declines into African countries of between 3 and 14 percentage points, with migrants to Europe hardest hit while migrants within Africa relatively unaffected by the crisis. The estimated impact on GDP for relatively remittance-dependent countries is 2 percent for 2009, but will likely be short-lived, as host country income is projected to rise in 2010.
    Keywords: Africa , Capital flows , Cross country analysis , Economic forecasting , Economic growth , Financial crisis , Global Financial Crisis 2008-2009 , Migration , Workers remittances ,
    Date: 2010–01–29
  13. By: Andrew Swiston
    Abstract: This paper investigates Central America's external linkages over the last fifteen years of increased integration in light of the 2008-09 global recession. Using structural VAR models, it is found that a one percent shock to U.S. growth shifts economic activity in Central America by 0.7 to 1 percent, on average. Spillovers from global shocks and the rest of the region also affect activity in some countries. Spillovers are mostly transmitted through advanced country financial conditions and fluctuations in external demand for Central American exports. Shocks to advanced economies associated with the 2008-09 financial crisis lowered economic activity in the region by 4 to 5 percent, on average, accounting for a majority of the observed slowdown. The impact was almost twice as large as elasticities estimated on pre-crisis data would have predicted. These results underscore the importance of operating credible policy frameworks that enable a countercyclical policy response to external shocks.
    Keywords: Business cycles , Capital flows , Central America , Cross country analysis , Economic growth , Economic integration , Economic models , External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Spillovers , Trade integration , United States , Workers remittances ,
    Date: 2010–02–17
  14. By: BRECHET, Thierry (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); PRIEUR, Fabien
    Keywords: overlapping generations, public education, environmental maintenance, green awareness, sustainable growth
    JEL: Q56 D62 D91
    Date: 2009–03–01
  15. By: Marcello M. Estevão; Tiago Severo
    Abstract: The paper investigates how changes in industries' funding costs affect total factor productivity (TFP) growth. Based on panel regressions using 31 U.S. and Canadian industries between 1991 and 2007, and using industries' dependence on external funding as an identification mechanism, we show that increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth. This finding cannot be explained by either increasing returns to scale or factor hoarding, as results are not sensitive to controlling for industry size and our calculations account for changes in factor utilization. Based on a stylized theoretical model, the estimates suggest that financial shocks distort the allocation of factors across firms even within an industry, reducing its TFP. The decline in productivity growth accounts for a large fraction of the negative impact of funding costs on output.
    Keywords: Bonds , Business cycles , Canada , Corporate sector , External financing , External shocks , Financial crisis , Industrial sector , Production growth , Productivity , United States ,
    Date: 2010–01–28
  16. By: Rasmus Kattai
    Abstract: This paper gives an overview of the credit risk model that has been developed for the Estonian banking system. The non-performing loans and loan loss provisions of the four largest banks and the rest of the banking sector have been modelled conditional on the underlying economic conditions: economic growth, unemployment, interest rates, in- flation, indebtedness and credit growth. The model highlights the importance of economic growth as the most influential factor behind the soundness of the banking sector in the latest downturn. The expected fall in output volatility will probably decrease the relative importance of output growth and increase the role of interest rates in the future.
    Keywords: credit risk, stress testing, financial soundness indicators, Estonian banking sector
    JEL: E32 E37 G21
    Date: 2010–02–04
  17. By: Giang Ho; Enrica Detragiache
    Abstract: A common legacy of banking crises is a large increase in government debt, as fiscal resources are used to shore up the banking system. Do crisis response strategies that commit more fiscal resources lower the economic costs of crises? Based on evidence from a sample of 40 banking crises we find that the answer is negative. In fact, policies that are riskier for the government budget are associated with worse, not better, post-crisis performance. We also show that parliamentary political systems are more prone to adopt bank rescue measures that are costly for the government budget. We take advantage of this relationship to instrument the policy response, thereby addressing concerns of joint endogeneity. We find no evidence that endogeneity is a source of bias.
    Keywords: Bank restructuring , Banking crisis , Banking sector , Cross country analysis , Economic growth , Economic models , Economic recovery , Fiscal policy , Governance , Government expenditures , Public finance , Stabilization measures ,
    Date: 2010–01–25
  18. By: Sampsa Samila; Olav Sorenson
    Abstract: We find that the enforcement of non-compete clauses significantly impedes entrepreneurship and employment growth. Based on a panel of metropolitan areas in the United States from 1993 to 2002, our results indicate that, relative to states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict the scope of these agreements has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment. We address potential endogeneity issues in the supply of venture capital by using endowment returns as an instrumental variable. Our results point to a strong interaction between financial intermediation and the legal regime in promoting entrepreneurship and economic growth.
    JEL: G24 K31 L26 O43
    Date: 2010
  19. By: Karsten Staehr
    Abstract: This paper discusses the public finances of the 10 new EU Countries from Central and Eastern Europe, with particular emphasis on the effects of the global financial crisis that started in 2008. The budget outcomes have differed markedly across the new EU countries, both before and during the crisis. The direct impact of the crisis on public finances was limited, but the severe downturns have strained public finances and increased debt ratios considerably. Estimations of budget reaction functions reveal that the budget balance has, in general, been moderately counter-cyclical, but also that the counter-cyclicality derives entirely from the revenue side. The medium-term fiscal outlook rests, to a large extent, on growth prospects. The uncertainties regarding future economic
    Keywords: global financial crisis, fiscal policy, budget reaction functions, Central and Eastern Europe
    JEL: H6 E62 P27
    Date: 2010–02–04

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