nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒05‒29
nineteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence By Andrea Vaona
  2. Short-Versus Long-Term Credit and Economic Performance: Evidence from the WAEMU By Kangni Kpodar; Kodzo Gbenyo
  3. Corruption in Public Finances, and the Effects on Inflation, Taxation, and Growth By Sugata Ghosh; Kyriakos C. Neanidis
  4. Study on quality of public finances in support of growth in the Mediterranean partner countries of the EU By CASE
  5. EU accession: A road to fast-track convergence? By Uwe Böwer; Alessandro Turrini
  6. The Uncertain Relationship between Corruption and Growth in Developing Countries: Threshold Effects and State Effectiveness By Alice N. Sindzingre; Christian Milelli
  7. Inequality amongst the wealthiest and its link with economic growth By Franses, Ph.H.B.F.; Vermeer, S.
  8. On the Effect of Technological Progress on Pollution: a New Distortion in an Endogenous Growth Model By Alexandra Ferreira Lopes; Tiago Sequeira e Catarina Roseta Palma
  9. Public Investment as a Fiscal Stimulus: Evidence from Japan's Regional Spending During the 1990s By Anita Tuladhar; Markus Bruckner
  10. Foreign direct investment, exports, and economic growth in selected emerging countries: Multivariate VAR analysis By Kalirajan, Kaliappa; Miankhel, Adil; Thangavelu, Shandre
  11. The connection between oil and economic growth revisited By Nuno Torres; Óscar Afonso; Isabel Soares
  12. Growth and Inverted U in Child Labour: A Dual Economy Approach By Nigar Hashimzade; Uma Kambhampati
  13. Do Rising Top Incomes Lift All Boats? By Dan Andrews; Christopher Jencks; Andrew Leigh
  14. Growth identification and facilitation : the role of the state in the dynamics of structural change By Lin, Justin Yifu; Monga, Celestin
  15. Recoveries in the Middle East, North Africa, and Pakistan: Have Macroeconomic Policies Been Effective? By Francesco Grigoli; Dalia Hakura
  16. IV Estimation of a Panel Threshold Model of Tourism Specialization and Economic Development By Chang, C-L.; Khamkaew, T.; McAleer, M.J.
  17. Oil Windfalls in Ghana: A DSGE Approach By Jan Gottschalk; Jihad Dagher; Rafael Portillo
  18. The Environment and Directed Technical Change By Acemoglu, Daron; Aghion, Philippe; Bursztyn, Leonardo; Hemous, David
  19. Humanitarian Aid, Fertility, and Economic Growth By Kyriakos C. Neanidis

  1. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: This paper explores the influence of inflation on economic growth both theoretically and empirically. We propose to merge an endogenous growth model of learning by doing with a New Keynesian one with sticky wages. We show that the intertemporal elasticity of substitution of working time is a key parameter for the shape of the inflation-growth nexus. When it is set equal to zero, the inflation-growth nexus is weak and hump-shaped. When it is greater than zero, inflation has a sizeable and negative effect on growth. Endogenizing the length of wage contracts does not lead to inflation superneutrality in presence of a fixed cost to wage resetting. Once adopting various semiparametric and instrumental variable estimation approaches on a cross-country/time-series dataset, we show that increasing inflation reduces real economic growth, consistently with our theoretical model with a positive intertemporal elasticity of substitution of working time.
    Keywords: inflation, growth, wage-staggering, learning-by-doing, semi- parametric estimator
    JEL: E31 E51 E52 O42 C14
    Date: 2010–05
  2. By: Kangni Kpodar; Kodzo Gbenyo
    Abstract: This paper studies the link between financial development and economic growth in the West African Economic and Monetary Union (WAEMU). Using panel data for WAEMU countries over the period 1995-2006, the results suggest that while financial development does support growth in the region, long-term bank financing has a greater impact on economic growth than short-term financing because long-term projects have higher returns adjusted for risks. Given that in the WAEMU short-term credit accounts for about 70 percent of credit to the private sector, WAEMU countries are less able to reap the full benefits of improvements in their financial systems. The results also highlight the importance of macroeconomic stability, a creditor-friendly environment, political stability, and the availability of long-term financial resources in fostering banks’ supply of long-term loans.
    Keywords: Bank credit , Banking sector , Credit risk , Cross country analysis , Economic growth , Economic models , Excess liquidity , Financial incentives , Human capital , Loans , Political economy , Time series , West African Economic and Monetary Union ,
    Date: 2010–05–06
  3. By: Sugata Ghosh; Kyriakos C. Neanidis
    Abstract: In this paper, we study the effects of bureaucratic corruption on inflation, taxation, and growth. Here corruption takes three forms: (i) it reduces the tax revenues that are raised from households, (ii) it inflates the volume of government spending, and (iii) it reduces the productivity of ‘effective’ government expenditure. Our policy experiments reveal that the effect of (i) is to increase both seigniorage and the income tax rate, and to decrease the steady-state growth rate. The effect of (ii) is to increase seigniorage, which leads to lower growth, although the effect on the income tax rate is ambiguous. The effect of (iii) is to increase seigniorage and decrease the income tax rate. The former yields a lower growth rate, while the latter has an ambiguous effect on growth. These findings, from our unified framework involving corruption in public finances, could rationalise the apparently conflicting evidence on the impact of corruption on economic growth provided in the literature, highlighting the presence of conditional corruption effects.
    Date: 2010
  4. By: CASE
    Abstract: Based on the conceptual framework developed by the European Commission for linking the quality of public finances and economic growth, this study examines empirically the key channels through which fiscal policy impacts economic growth in the Mediterranean partner countries of the EU. The results confirm that the function of specific disaggregated fiscal parameters like debt financing, governance, efficiency of spending, mixture of taxes can have a significant impact on growth.
    Keywords: Quality of public finances,fiscal policy,growth,public sector governance,Mediterranean partner countries. Study on Qualit
    JEL: H1 H2 H3 H5 H6 H7 E6 O1 O2 O4
    Date: 2009–12
  5. By: Uwe Böwer; Alessandro Turrini
    Abstract: This paper investigates the accession-related economic boom in the countries which recently entered the European Union. The analysis tests whether, on top of the standard growth determinants, the period of EU accession made a significant difference to the growth performance of the New Member States (NMS). The paper finds that the period of EU accession is characterised by significantly larger growth rates of per-capita GDP, even after controlling for a wide range of economic and institutional factors. This effect is robust and particularly strong for countries with relatively low initial income levels, weak institutional quality and less advanced financial development, suggesting that EU accession has been speeding up the catching-up process and improved the institutions of the laggards among the NMS. The prospect of EU membership which has triggered large capital inflows seems to have fostered economic growth of those NMS with lower degrees of financial depth.
    Keywords: Economic growth,EU accession,new member states,convergence,Böwer,Turrini,European Economy. Economic Papers
    JEL: O47 F15
    Date: 2009–12
  6. By: Alice N. Sindzingre; Christian Milelli
    Abstract: In the literature of development economics, corruption is usually conceived as detrimental to economic growth. This conventional wisdom, however, may be called into question. Many countries witnessed growth despite corruption, e.g., commodity-dependent and high-growth East Asian countries. The paper argues, through a comparison of Sub-Saharan Africa and East Asia, that the relationships between corruption and economic growth are difficult to demonstrate. It highlights two crucial factors that explain the lack of robustness of this relationship. Firstly, this lack of robustness stems from the methods of measurement, which are usually based on the building of indices, modelling and econometric techniques. These methods are inappropriate for a concept such as ‘corruption’, which refers to complex and heterogeneous phenomena that are difficult to subsume in a single and stable definition. A second set of factors underlying the weakness of the relationship between corruption and growth is the dependence of causal processes on specific contexts. The effects of corrupt practices on an economy depend on its particular history, its economic structures, its political economy and types of institutions: for these reasons, they vary across countries and regions. Causal links between corruption and growth may exist, but they are non-linear and subject to threshold effects. Beyond certain thresholds, which are built by specific contexts (i.e., the combination of many contextual factors, political, economic, institutional), corruption phenomena can be detrimental to growth; before reaching these thresholds, the impact of corruption on growth may be limited. These thresholds can be assessed only ex post: they cannot be measured ex ante, as they precisely depend on contexts that vary across space, countries and history. In some contexts, economic and political factors may reinforce each other, e.g. corruption, political instability, economic distortions and vulnerability, such as commodity-based market structures. This results in ‘low equilibria’ that combine low growth and pervasive corruption, and thresholds, which, once low equilibria are stabilised, it is very difficult to get out from under (‘poverty traps’). In other contexts, these factors may all exist. They remain separated, however; corruption does not combine with other economic and political factors and is contained, which makes it possible for countries not to fall into ‘lower’ equilibria. The state is here the core entity able to prevent the reciprocal reinforcement of corruption and other economic or political structures - and hence the formation of poverty traps -, and to make corruption subservient to growth objectives. This state capacity that can confine and control corruption, which exists in some countries but not in others, is a key factor in the differences in impacts of corruption on growth.
    Keywords: corruption, growth, political economy, Sub-Saharan Africa, East Asia
    JEL: O10 O43 K40
    Date: 2010
  7. By: Franses, Ph.H.B.F.; Vermeer, S.
    Abstract: In this paper we correlate the key features of the distribution of wealth of the 500 wealthiest individuals in the Netherlands with economic growth and stock market returns for 1998 to 2009. We show that each year the distribution obeys a power law and that the key parameter measures the degree of inequality. Our main finding is that more inequality amongst the wealthiest is associated with higher economic growth.
    Keywords: wealth distribution;power law;economic growth
    Date: 2010–04–29
  8. By: Alexandra Ferreira Lopes (Departamento de Economia, ISCTE); Tiago Sequeira e Catarina Roseta Palma (Departamento de Gestão e Economia, Universidade da Beira Interior; Departamento de Economia, ISCTE.)
    Abstract: We derive a model of endogenous growth with physical capital, human capital and technological progress through quality-ladders. We introduce welfare-decreasing pollution in the model, which can be reduced through the development of cleaner technologies. From the quantitative analysis of the model we show clear evidence that the new externality from technological progress to pollution considered in this model is sufficiently strong to induce underinvestment in R&D as an outcome of the decentralized equilibrium. An important policy implication of the main result of this article is a justification to subsidize the research in cleaner technologies.
    Keywords: Environmental Pollution, R&D, Social Capital, Human Capital, Economic Growth
    JEL: O13 O15 O31 O41 Q50
    Date: 2010
  9. By: Anita Tuladhar; Markus Bruckner
    Abstract: How effective was public investment in stimulating the Japanese economy during the economic stagnation of the 1990s? Using a dataset of regional public investment spending, we find that investment multipliers were higher than for public consumption, although they were relatively low and declining over time. The paper also finds that the effectiveness of economic infrastructure investment, implemented mainly by the central government, is lower than that of social investment mostly undertaken by local governments. These results suggest that while public investment may yield higher output effects than other spending, its effectiveness depends upon its composition, the level of government implementation, and supply side factors.
    Keywords: Economic models , Financial crisis , Fiscal policy , Governance , Government expenditures , Japan , Public investment ,
    Date: 2010–04–30
  10. By: Kalirajan, Kaliappa; Miankhel, Adil; Thangavelu, Shandre
    Abstract: The paper adopts a time series framework of the Vector Error Correction Models (VECM) to study the dynamic relationship between export, FDI and GDP for six emerging countries of Chile, India, Mexico, Malaysia, Pakistan and Thailand. Stationarity of the series with structural breaks is also examined in the model. Given that these countries are at different stages of growth, we will be able to identify the impact of FDI and export on economic growth at different stages of growth. The results suggest that in South Asia, there is evidence of an export led growth hypothesis. However, in the long run, we identify GDP growth as the common factor that drives growth in other variables such as exports in the case of Pakistan and FDI in the case of India. The Latin American countries of Mexico and Chile show a different relationship in the short run but in the long run, exports affect the growth of FDI and output. In the case of East Asian countries, we find bi-directional long run relationship among exports, FDI and GDP in Malaysia, while we find a long run uni-directional relationship from GDP to export in case of Thailand.
    Keywords: FDI; Exports; Multivariate VAR; Pakistan; India; Malaysia; Thailand; Chile; Mexico.
    JEL: C22 F43 B41
    Date: 2009–05–28
  11. By: Nuno Torres (Faculdade de Economia, Universidade do Porto, Portugal); Óscar Afonso (CEF.UP, OBEGEF and Faculdade de Economia, Universidade do Porto, Portugal); Isabel Soares (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: This study shows that the cross-section “curse” result found with oil abundance indicators for producing countries disappears in a panel estimation considering the most important growth factors. This happens even excluding institutional quality, which is hindered by oil and ores abundance in several cross-section studies, causing the resource curse. In our estimations, neither of the oil indicators shows a significant impact on growth, but when we consider rig productivity there is a positive effect by capital efficiency in: (i) countries with medium and low income per head from East Asia & Pacific and Latin America & the Caribbean, all technological followers; (ii) countries with high income inequality. These results can reflect the broader scope for factor efficiency increases in less developed countries arising from the oil industry, which is described by a highly globalised know-how.
    Keywords: Energy, Economic growth, Institutions, Natural resource curse, Panel data
    JEL: C23 O13 O47 O50 Q0 Q40
    Date: 2010–05
  12. By: Nigar Hashimzade (School of Economics, University of Reading); Uma Kambhampati (School of Economics, University of Reading)
    Abstract: While it is commonly accepted that the main cause of child labour is poverty, empirical observations suggest that economic growth is not always associated with the reduction in child labour. We show, in a dual economy framework, that the e¤ect of productivity growth upon child labour may be positive or negative. In particular, changes in the productivity gap between the modern and the traditional sectors, due to the technological progress, can generate an increase in child labour. In a dynamic version of the model we also investigate how this e¤ect depends on the quality of schooling.
    Date: 2010–05–03
  13. By: Dan Andrews; Christopher Jencks; Andrew Leigh
    Abstract: Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile’s income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates. If the increase in inequality is permanent, the increase in growth appears to be permanent. However, our estimates imply that it would take 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.
    Keywords: inequality, growth, income distribution, national income
    JEL: D31 N10 O57
    Date: 2010–04
  14. By: Lin, Justin Yifu; Monga, Celestin
    Abstract: Active economic policies by developing countries’ governments to promote growth and industrialization have generally been viewed with suspicion by economists, and for good reasons: past experiences show that such policies have too often failed to achieve their stated objectives. But the historical record also indicates that in all successful economies, the state has alwaysplayed an important role in facilitating structural change and helping the private sector sustain it across time. This paper proposes a new approach to help policymakers in developing countries identify those industries that may hold latent comparative advantage. It also recommends ways of removing binding constraints to facilitate private firms’ entry into those industries. The paper introduces an important distinction between two types of government interventions. First are policies that facilitate structural change by overcoming information and coordination and externality issues, which are intrinsic to industrial upgrading and diversification. Such interventions aim to provide information, compensate for externalities, and coordinate improvements in the"hard"and"soft"infrastructure that are needed for the private sector to grow in sync with the dynamic change in the economy’s comparative advantage. Second are those policies aimed at protecting some selected firms and industries that defy the comparative advantage determined by the existing endowment structure—either in new sectors that are too advanced or in old sectors that have lost comparative advantage.
    Keywords: Economic Theory&Research,Environmental Economics&Policies,Achieving Shared Growth,Emerging Markets,Debt Markets
    Date: 2010–05–01
  15. By: Francesco Grigoli; Dalia Hakura
    Abstract: This paper identifies and documents the properties of output gap recessions and recoveries in the Middle East, North Africa, and Pakistan (MENAP) during the 1980 to 2008 period. It goes on to investigate the key determinants of the recoveries. The duration of MENAP countries’ recessions and recoveries has increased from the 1990s to the 2000s. MENAP hydrocarbon exporting countries’ recessions were on average more pronounced in the 2000s, and hydrocarbon importing countries’ recessions milder. Fiscal policy is found to have played a key role during the recoveries to potential output, although with weaker effects for MENAP countries that are more open to trade. Monetary policy is found to have been less effective. This is likely to be related to the fact that many of the MENAP countries have fixed exchange rate regimes and hence have limited room for active monetary policy.
    Keywords: Economic models , Economic recession , Economic recovery , Fiscal policy , Hydrocarbons , Investment , Middle East , Monetary policy , North Africa , Oil exporting countries , Pakistan , Production growth , Trade liberalization ,
    Date: 2010–05–03
  16. By: Chang, C-L.; Khamkaew, T.; McAleer, M.J.
    Abstract: The significant impact of international tourism in stimulating economic growth is especially important from a policy perspective. For this reason, the relationship between international tourism and economic growth would seem to be an interesting and topical empirical issue. The purpose of this paper is to investigate whether tourism specialization is important for economic development in 159 countries over the period 1989-2008. The results from panel threshold regressions show a positive relationship between economic growth and tourism. Instrumental variable estimation of a threshold regression is used to quantify the contributions of tourism specialization to economic growth, while correcting for endogeneity between the regressors and error term. The significant impact of tourism specialization on economic growth in most regressions is robust to different specifications of tourism specialization, as well as to differences in real GDP measurement. However, the coefficients of the tourism specialization variables in the two regimes are significantly different, with a higher impact of tourism on economic growth found in the low regime. These findings do not change with changes in the threshold variables. The empirical results suggest that tourism growth does not always lead to substantial economic growth.
    Keywords: international tourism;economic development;tourism specialization;threshold regression;instrumental variables;panel data;cross-sectional data
    Date: 2010–04–29
  17. By: Jan Gottschalk; Jihad Dagher; Rafael Portillo
    Abstract: We use a calibrated multi-sector DSGE model to analyze the likely impact of oil windfalls on the Ghanaian economy, under alternative fiscal and monetary policy responses. We distinguish between the short-run impact, associated with demand-related pressures, and the medium run impact on competitiveness and growth. The impact on inflation and the real exchange rate could be moderate, especially if the fiscal authorities smooth oil-related spending or increase public spending’s import content. However, a policy mix that results in both a fiscal expansion and the simultaneous accumulation of the foreign currency proceeds from oil as international reserves—to offset the real appreciation—would raise demand pressures and crowd-out the private sector. In the medium term, the negative impact on competitiveness—resulting from â€Dutch Disease†effects—could be small, provided public spending increases the stock of productive public capital. These findings highlight the role of different policy responses, and their interaction, for the macroeconomic impact of oil proceeds.
    Keywords: Demand , Economic models , Exchange rate appreciation , Fiscal policy , Ghana , Government expenditures , Inflation , Monetary policy , Nonoil sector , Oil production , Oil revenues , Reserves accumulation ,
    Date: 2010–05–06
  18. By: Acemoglu, Daron (Harvard); Aghion, Philippe (Institute for International Economic Studies, Stockholm University); Bursztyn, Leonardo (Harvard); Hemous, David (Harvard)
    Abstract: This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses “dirty” machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.
    Keywords: environment; exhaustible resources; directed technological change; innovation
    JEL: C65 O30 O31 O33
    Date: 2010–04–25
  19. By: Kyriakos C. Neanidis
    Abstract: This paper examines the e¤ect of humanitarian aid on the rates of fertility and economic growth in recipient countries. We develop a two-period overlapping generations model where reproductive agents face a non-zero probability of death in childhood. As adults, agents allocate their time to work, leisure, and child rearing activities of surviving children. Health status in adulthood exhibits “state dependence”as it depends on health in childhood. Humanitarian aid in‡uences the probability of survival to adulthood, health in childhood, and the time adults allocate to child rearing, giving rise to an ambiguous e¤ect on both the rates of fertility and growth. An empirical examination for the period 1973-2007 suggests that humanitarian aid has on average a zero e¤ect on both the fertility rate and the rate of per capita output growth. The …ndings are robust to a wide number of sensitivity considerations.
    Date: 2010

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