nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒04‒24
five papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Is Government Ownership of Banks Really Harmful to Growth? By Svetlana Andrianova; Panicos Demetriades; Anja Shortland
  2. Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending By Futagami, Koichi; Hori, Takeo; Ohdoi, Ryoji
  3. Banking Crises and Short and Medium Term Output Losses in Developing Countries: The Role of Structural and Policy Variables By Davide, Furceri; Aleksandra, Zdzienicka
  4. Inflation, Growth and Exchange Rate Regimes in Small Open Economies By Paula Hernandez-Verme
  5. A note on GDP now-/forecasting with dynamic versus static factor models along a business cycle By Buss, Ginters

  1. By: Svetlana Andrianova; Panicos Demetriades; Anja Shortland
    Abstract: We show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to adding more 'fundamental' determinants of economic growth. We also present new cross-country evidence for 1995-2007 which suggests that, if anything, government ownership of banks has been robustly associated with higher long run growth rates. While acknowledging that cross-country results need not imply causality, we nevertheless provide a conceptual framework, drawing on the global financial crisis of 2008-09, which explains why under certain circumstances government owned banks could be more conducive to economic growth than privately-owned banks.
    Keywords: Public banks, economic growth, quality of governance, regulation, political institutions
    JEL: O16 G18 G28 K42
    Date: 2010
  2. By: Futagami, Koichi (Asian Development Bank Institute); Hori, Takeo (Asian Development Bank Institute); Ohdoi, Ryoji (Asian Development Bank Institute)
    Abstract: In this paper, we examine the effects of introducing constraints on government borrowing using a continuous-time overlapping generations model of a small open economy. We consider government placing constraints on the amount of government bonds outstanding by establishing an upper limit, or target level, for the ratio of government bonds to gross domestic product. We first show that there exist multiple steady states in the model small open economy. One is a steady state with high growth, the other a steady state with low growth. We next examine how changes in the target level for bonds affect economic growth rates at the steady states. If the economy has a positive amount of asset holdings, we obtain the following results. When the government runs budget surpluses, an increase in the target level for government bonds reduces the growth rate of the low-growth economy, but raises the growth rate of the high-growth economy. However, when the government runs budget deficits, an increase in the target level for government bonds raises the growth rate of the low-growth economy, but reduces the growth rate of the high-growth economy. If the economy has a negative amount of asset holdings, the results are ambiguous.
    Keywords: constraints on government borrowing; small open economy
    JEL: H54 H63 O10
    Date: 2010–04–14
  3. By: Davide, Furceri; Aleksandra, Zdzienicka
    Abstract: The aim of this work is to assess the short and medium term impact of banking crises on developing economies. Using an unbalanced panel of 159 countries from 1970 to 2006, the paper shows that banking crises produce significant output losses, both in the short and in the medium term. The effect depends on structural and policy variables. Output losses are larger for relatively more wealthy economies, characterized by a higher level of financial deepening and larger current account imbalances. Flexible exchange rates, fiscal and monetary policy have been found to be efficient tools to attenuate the effect of the crises. Among banking intervention policies, liquidity support resulted to be the one associated with lower output losses.
    Keywords: Output Growth; Financial Crisis.
    JEL: E60
    Date: 2010
  4. By: Paula Hernandez-Verme (Department of Economics and Finance, Universidad de Guanajuato)
    Abstract: This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations.
    Keywords: Currency Board, Endogenously Arising Volatility, Fixed exchange rates, Floating exchange rates, Growth, Indeterminacy, Inflation, Multiple Reserve Requirements, Private Information, Stabilization
    JEL: E31 E32 E42 E44 F31 F33 G14 G18 O16
    Date: 2009–07
  5. By: Buss, Ginters
    Abstract: We build a small-scale factor model for the GDP of one of the hardest hit economies during the latest recession to study the exact dynamic versus static factor model performance along a business cycle, with an emphasis placing on nowcasting performance during a pronounced switch of business cycle phases due to the latest recession. We compare the factor models' nowcasting performance to a random walk, autoregressive and the best-performing nowcasting models at our hands, which are vector autoregressive (VAR) models. It is shown that a small-scale static factor-augmented VAR (FAVAR) model tends to improve upon the nowcasting performance of the VAR models when the model span and the nowcasting period stretch beyond a single business cycle phase, while exact dynamic factor models tend to fail to detect the timing and depth of the recession regardless of ARMA specifications. As regards the case when the model span and the nowcasting period are contained within a single business cycle phase, static and dynamic factor models appear to show similar performance with potentially slight superiority of dynamic factor models if the factor-forming set of variables and factor dynamics are carefully selected.
    Keywords: nowcasting; business cycle; static versus dynamic factors; small-scale FAVAR; VAR; GDP
    JEL: C32 C53 C52 C22
    Date: 2010–04–16

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