nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒07‒10
eighteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. The Effect of Government Purchases on Economic Growth in Japan By Federico Guerrero; Elliott Parker
  2. Capital mobility, balance of payments constraints, and economic growth: an empirical dynamic analysis. By Sérgio Fornazier Meirelles Filho; Frederico Gonzaga Jayme Jr
  3. Public investment in basic education and economic growth By Kuhl Teles, Vladimir; Andrade, Joaquim
  4. Financial Conditions Indexes: A Fresh Look after the Financial Crisis By Jan Hatzius; Peter Hooper; Frederic S. Mishkin; Kermit L. Schoenholtz; Mark W. Watson
  5. Cohesion policy in the European Union: Growth, geography, institutions By Thomas Farole; Andrés Rodríguez-Pose; Michael Storper
  6. The impact of the global economic and financial crisis on central, eastern and south-eastern Europe - A stock-taking exercise By Fédéric Holm-Hadulla; Sándor Gardó; Reiner Martin
  7. On the Growth-Maximizing Allocation of Public Investment By Pantelis Kalaitzidakis; Vangelis Tzouvelekas
  8. The Structure of Tariffs and Long-Term Growth By Nathan Nunn; Daniel Trefler
  9. Is two better than one? Effects on growth of Bank-Fund interaction By Sivlai Marchesi; Emanuela Sirtori
  10. The global financial crisis and development thinking By Rogers, F. Halsey
  11. Decomposition of Labor Productivity Growth: A Multilateral Production Frontier Approach By Konstantinos Chatzimichael; Vangelis Tzouvelekas
  12. Shadow Economy and Poverty By Nikopour , Hesam; Shah Habibullah, Muzafar
  13. Rebalancing Growth in the Republic of Korea By Ha, Joonkyung; Lee, Jong-Wha; Sumulong, Lea
  14. Does history matter for the relationship between R&D, Innovation and Productivity? By Huergo , E; Moreno, L
  15. "The Great Crisis and the American Response" By James K. Galbraith
  16. Lessons from Japan's Banking Crisis, 1991–2005 By Fujii, Mariko; Kawai, Masahiro
  17. Macroeconomic trouble and policy challenges in the wake of the financial bust By Angel Asensio
  18. Crisis? What Crisis? Currency vs. Banking in the Financial Crisis of 1931 By Albrecht Ritschl; Samad Salferaz

  1. By: Federico Guerrero (Department of Economics, University of Nevada, Reno); Elliott Parker (Department of Economics, University of Nevada, Reno)
    Abstract: We consider whether there is statistical evidence for a causal relationship between government expenditures and real GDP growth in postwar Japan. After studying the time-series properties of these variables, we find that government consumption and government investment both have a positive and causal effect on growth. This suggests that fiscal policy may not have been as ineffective during the last two decades of Japan’s stagnant growth as some have suggested, but may have helped to prevent an even more severe balance-sheet recession after the collapse of the Japanese bubble economy.
    Keywords: Long-term economic growth; Japan; Government size; Cointegration; Granger causality; Vector autoregression; Vector error correction model
    JEL: G32 G15 D92 E65 F39
    Date: 2010–06
  2. By: Sérgio Fornazier Meirelles Filho (FACE-UFG, Ciências Econômicas); Frederico Gonzaga Jayme Jr (Cedeplar/UFG)
    Abstract: This paper analyses empirically the relationship between economic growth and the openness of the financial account of the balance of payments. It takes into consideration the balance of payments’ constrained growth, as well as the difficulties in the empirical literature in measuring capital mobility. Starting from traditional capital mobility indexes we estimate a panel across 80 countries, both developed and developing between 1979-2003. Results suggest that more capital mobility in developing countries affects growth negatively, whereas it possibly stimulates growth in developed countries.
    Keywords: Economic Growth, Capital Mobility, Dynamic Panel.
    JEL: F41 F43
    Date: 2010–06
  3. By: Kuhl Teles, Vladimir; Andrade, Joaquim
    Abstract: The main objective of this paper was to visualize the relation between governmentspending on basic education and the human capital accumulation process, observingthe impacts of this spending on individual investments in higher education, and oneconomic growth. It is used an overlapping-generations model where the governmenttax the adult generation and spent it in basic education of the next generations. Itwas demonstrated that the magnitude of the marginal effect of government spendingin basic education on growth crucially depends on public budget constrains. The paperexplains why some countries with a lot of public investment in basic education growthat low rates. In that sense if a country has only a lot of public investment in basiceducation without investment in higher education it may growth at low rates becausethe taxation can cause distortions in the agents incentives to invest in higher education.
    Date: 2010–06–29
  4. By: Jan Hatzius; Peter Hooper; Frederic S. Mishkin; Kermit L. Schoenholtz; Mark W. Watson
    Abstract: This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes. Third, we control for past GDP growth and inflation and thus focus on the predictive power of financial conditions for future economic activity. During most of the past two decades for which comparisons are possible, including the last five years, our FCI shows a tighter link with future economic activity than existing indexes, although some of this undoubtedly reflects the fact that we selected the variables partly based on our observation of the recent financial crisis. As of the end of 2009, our FCI showed financial conditions at somewhat worse-than-normal levels. The main reason is that various quantitative credit measures (especially issuance of asset backed securities) remained unusually weak for an economy that had resumed expanding. Thus, our analysis is consistent with an ongoing modest drag from financial conditions on economic growth in 2010.
    JEL: E17 E44 E5
    Date: 2010–07
  5. By: Thomas Farole (The World Bank); Andrés Rodríguez-Pose (IMDEA Ciencias Sociales); Michael Storper (London School of Economics)
    Abstract: Since the reform of the Structural Funds in 1989, the EU has made the principle of cohesion one of its key policies. Much of the language of European cohesion policy eschews the idea of tradeoffs between efficiency and equity, suggesting it is possible to maximise overall growth whilst also achieving continuous convergence in outcomes and productivity across Europe’s regions. Yet, given the rise in inter-regional disparities, it is unclear that cohesion policy has altered the pathway of development from what would have occurred in the absence of intervention. This paper draws on geographical economics, institutionalist social science, and endogenous growth theory, with the aim of providing a fresh look at cohesion policy. By highlighting a complex set of potential tradeoffs and inter-relations – overall growth and efficiency; inter-territorial equity; territorial democracy and governance capacities; and social equity within places – it revisits the rationale of cohesion policy, with particular attention to the geographical dynamics of economic development.
    Date: 2010–06–25
  6. By: Fédéric Holm-Hadulla (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Sándor Gardó (Oesterreichische Nationalbank, Foreign Research Division, Otto-Wagner-Platz 3, A - 1090 Wien, Austria); Reiner Martin (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: The paper first reviews the main drivers of the growth and real convergence process in central, eastern and south-eastern Europe (CESEE) since 2000 and assesses the key macro-financial strengths and vulnerabilities of the region at the beginning of the global economic and financial crisis. The main part of the paper reviews financial and real economic developments in these countries since the crisis started to impact the CESEE region. The paper finds that developments have been rather heterogeneous in the region. CESEE countries with the largest economic imbalances tended to be most affected. National and international support measures appear to have helped to stabilise financial markets, and parent banks of foreign bank subsidiaries in CESEE were committed to sustaining their exposure to the region. The degree to which CESEE governments were able to use policy instruments to counter the real effects of the crisis is rather heterogeneous, depending inter alia on the exchange rate regime in place and the initial fiscal positions. JEL Classification: F15, F32, G01, G15, G18, H40
    Keywords: Financial crisis, vulnerability indicators, central, eastern and south-eastern Europe
    Date: 2010–06
  7. By: Pantelis Kalaitzidakis (Dept of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
    Abstract: In this paper we present an endogenous growth model to analyze the growth maximizing allocation of public investment among N different types of public capital. Using this general model of public capital formation, we analyze the stability of the long-run equilibrium and we derive the growth-maximizing values of the shares of public investment allocated to the different types of public capital, as well as the growth-maximizing tax rate (amount of total public investment as a share of GDP). The empirical implication of the modelis that both the effects of the shares of public investment and the tax rate on the long-run growth rate are non-linear, following an inverse U-shaped pattern.
    Date: 2010–07–01
  8. By: Nathan Nunn; Daniel Trefler
    Abstract: We show that the ‘skill-bias’ of a country’s tariff structure is positively correlated with long-term per capita GDP growth. Testing for causal mechanisms, we find evidence consistent with the existence of real benefits from tariffs focused in skill-intensive industries. However, this only accounts for a quarter of the total correlation between skill-biased tariffs and growth. Turning to alternative explanations, we extend the standard Grossman-Helpman ‘protection-for-sale’ model and show how the skill-bias of tariffs can reflect the extent of domestic rent-seeking activities in the economy. We provide evidence that the remaining variation is explained by this endogeneity.[Working Paper No.]
    Keywords: International trade; Tariffs; Political economy of protection; Economic growth.
    Date: 2010
  9. By: Sivlai Marchesi; Emanuela Sirtori
    Abstract: We estimate the impact on economic growth of the joint participation in both IMF and WB programs. More specifically, using panel data for 128 developing countries over the period 1982-2005, and employing 2SLS to control for the possible endogeneity of participation in an IMF/WB program, we find that even if the WB and the IMF do not boost growth when they operate by themselves, the interaction term between these two organization is positive and significant at conventional levels. However, when we restrict the sample to low and lower middle income countries only (for which Bank-Fund cooperation is more “formalized”) the coefficient of the interaction term is not significant. Thus, so far, a trade-off emerges between a greater precision in the definition of Bank-Fund cooperation and the reliability of the estimates due to an insufficient number of observations.
    Date: 2010–06
  10. By: Rogers, F. Halsey
    Abstract: The global financial crisis has not only dealt a major blow to the global economy, but also shaken confidence in economic management in the developed world and the economic models that guide it. The crisis has revealed major market failures, especially in the housing bubble and its transmission to the financial system, but also glaring state failures that propagated and exacerbated the crisis. Will the events of the past two years lead to major shifts in thinking about development economics, and should they? This paper assesses that question for several key domains of development thinking, including the market-state balance, macroeconomic management, globalization, development financing, and public spending. On the one hand, changed global circumstances and new awareness of vulnerability should lead to some policy changes, as developing countries take steps to reduce and buffer risks, including risks generated in developed countries. At the same time, the crisis should largely reinforce the Post-Washington Consensus on development that has emerged over the past decade -- a world view that aims to achieve private sector-driven growth but sees a facilitating role for the state, promotes engaging with the global economy in ways that advance development, and values pragmatism, experimentation, and evidence-based policymaking over ideology.
    Keywords: Debt Markets,Economic Theory&Research,Banks&Banking Reform,Climate Change Economics,Emerging Markets
    Date: 2010–06–01
  11. By: Konstantinos Chatzimichael (Dept of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
    Abstract: This paper develops a parametric decomposition framework of labor productivity growth relaxing the assumption of labor-specific efficiency. The decomposition analysis is applied to a sample of 52 developed and developing countries from 1965-90. A generalized Cobb-Douglas functional specification is used taking into account differences in technological structures across group of countries to approximate aggregate production technology using Jorgenson and Nishimizu (1978) bilateral model of production. Measurement of labor efficiency is based on Kopp�s (1981) orthogonal non-radial index of factor-specific efficiency modified in a parametric frontier framework. The empirical results indicate that the weighted average annual rate of labor productivity growth was 1.43 per cent over the period analyzed. Technical change was found to be the driving force of labor productivity, while improvements in labor efficiency and human capital account approximately for the 22 per cent of that productivity growth.
    Keywords: labor efficiency and productivity growth, multilateral production frontier
    JEL: J24 O40 C23
    Date: 2010–07–01
  12. By: Nikopour , Hesam; Shah Habibullah, Muzafar
    Abstract: This study attempts to investigate the relationship between shadow economy and poverty by explaining the mechanism through which shadow economy affects poverty via its impact on government size and economic growth, and using the human poverty index (HPI) for developing and developed countries. In order to achieve this objective, the three-way interaction model is utilized using data of 139 developing and 23 developed countries separately during 1999-2007. For developing countries the dynamic panel system GMM and for developed countries, the fixed and random effects method of estimation is used. The results suggest that increasing the shadow economy leads to increase poverty in developing countries while it decreases poverty in developed countries.
    Keywords: Shadow economy; Poverty; Panel data analysis
    JEL: O17 C23 I3
    Date: 2010–06–05
  13. By: Ha, Joonkyung (Asian Development Bank Institute); Lee, Jong-Wha (Asian Development Bank Institute); Sumulong, Lea (Asian Development Bank Institute)
    Abstract: The current account surplus of the Republic of Korea (henceforth Korea) increased significantly in the immediate recovery period after the 1997-1998 Asian financial crisis. Since then the surplus has gradually diminished, and from 2006 to 2008, the current account was close to being balanced. Econometric analysis reveals that the effect of exchange rate changes on Korea's trade is not robust during non-crisis periods. Exchange rates only significantly affect trade when observations during crisis periods are included. This suggests that exchange rate adjustments alone will not solve the imbalance issue. Korea's external imbalances are not only caused by external factors; they also reflect internal and policy factors such as: (i) saving-investment imbalances; (ii) export-oriented policies; and (iii) the unbalanced structure of manufacturing and services. These internal imbalances result from domestic distortions and structural imbalances arising from market inefficiencies and public policies. These must be addressed to ensure balanced and sustained economic growth.
    Keywords: korea economic growth; korea external imbalances; korea trade
    JEL: E20 E60 F40 O10 O20
    Date: 2010–07–01
  14. By: Huergo , E; Moreno, L
    Abstract: This paper analyzes the relationship between R&D expenditures, innovation and productivity growth, taking into account the possibility of persistence in firms’ behaviour. We study this relationship for a sample of Spanish manufacturing firms between 1990 and 2005, estimating a model with four equations: participation in technological activities, R&D intensity, the generation of innovations and the impact of these technological outputs on total factor productivity growth. Our results reflect the existence of true state dependence both in the decision of R&D investment and in the production of innovations. The omission of this persistence leads to an overestimation of the current impact of innovations on productivity growth. However, the presence of persistence in technological inputs and outputs entails current R&D activities having long–run effects on a firm’s productivity.
    Keywords: CDM model; productivity growth; persistence in R&D and innovation.
    JEL: L6 D24 O3
    Date: 2010–05–10
  15. By: James K. Galbraith
    Abstract: The global abatement of the inflationary climate of the past three decades, combined with continuing financial instability, helped to promote the worldwide holding of U.S. dollar reserves as a cushion against financial instability outside the United States, with the result that, for the United States itself, this was a period of remarkable price stability and reasonably stable economic expansion. For the most part, the economics profession viewed these events as a story of central bank credibility, fiscal probity, and accelerating technological change coupled with changing demands on the labor market, creating a model of self-stabilizing free markets and hands-off policy makers motivated by doing the right thing - what Senior Scholar James K. Galbraith calls "the grand illusion of the Great Moderation." A dissenting line of criticism focused on the stagnation of real wages, the growth of deficits in trade and the current account, and the search for new markets. This view implied that a crisis would occur, but that it would result from a rejection of U.S. financial hegemony and a crash of the dollar, with the euro and the European Union (EU) the ostensible beneficiaries. A third line of argument was articulated by two figures with substantially different perspectives on the Keynesian tradition: Wynne Godley and Hyman P. Minsky. Galbraith discusses the approaches of these Levy distinguished scholars, including Godley’s correlation of government surpluses and private debt accumulation and Minsky's financial stability hypothesis, as well as their influence on the responses of the larger economic community. Galbraith himself argues the fundamental illusion of viewing the U.S. economy through the free-market prism of deregulation, privatization, and a benevolent government operating mainly through monetary stabilization. The real sources of American economic power, he says, lie with those who manage and control the public-private sectors - especially the public institutions in those sectors - and who often have a political agenda in hand. Galbraith calls this the predator state: a state that is not intent upon restructuring the rules in any idealistic way but upon using the existing institutions as a device for political patronage on a grand scale. And it is closely aligned with deregulation.
    Date: 2010–06
  16. By: Fujii, Mariko (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: The Japanese government's response to the financial crisis in the 1990s was late, unprepared and insufficient; it failed to recognize the severity of the crisis, which developed slowly; faced no major domestic or external constraints; and lacked an adequate legal framework for bank resolution. Policy measures adopted after the 1997–1998 systemic crisis, supported by a newly established comprehensive framework for bank resolution, were more decisive. Banking sector problems were eventually resolved by a series of policies implemented from that period, together with an export-led economic recovery. Japan's experience suggests that it is vital for a government not only to recapitalize the banking system but also to provide banks with adequate incentives to dispose of troubled assets from their balance sheets, even if that required the government to mobilize regulatory measures to do so, as was done in Japan in 2002. Economic stagnation can cause new nonperforming loans to emerge rapidly, and deplete bank capital. If the authorities do not address the banking sector problem promptly, then the crisis will prolong and economic recovery will be substantially delayed.
    Keywords: japan banking crisis; 1990s; bank capital; financial regulation
    JEL: G21 G28
    Date: 2010–06–29
  17. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Contrasting with the 1929 great crisis, authorities intervened forcefully in 2008 to stop the disintegration of the financial system. Governments and central banks then sought to revise the prudential regulation in depth. It would be optimistic, however, to believe that prudential measures, alone, could deliver full economic recovery, for the collapse of the 'state of confidence' has fed depressive forces and policy challenges which could hold for a while, even once the financial sector is made safe. On the one hand, the economic slowdown and the direct and indirect assistance provided by the governments to the private sectors are having a heavy impact on public finances, meanwhile, on the other hand, the massive amounts of money which artificially inflated the prices of housing and financial products could produce inflationary pressures in the post-crisis period, unless a new assets bubble is allowed for. Authorities could therefore be facing high unemployment in a damaged context of public deficits and inflationary pressures. The paper aims at discussing these new challenges. The inadequacy of inflation targets and fiscal orthodoxy in a depressed economy is emphasized, and the outlines of a Post Keynesian alternative policy are examined.
    Keywords: alternative macroeconomic policy; monetary policy; fiscal policy; economic crisis; public debt; inflationary pressures
    Date: 2010–05
  18. By: Albrecht Ritschl; Samad Salferaz
    Abstract: This paper examines the role of currency and banking in the German financial crisis of 1931for both Germany and the U.S. We specify a structural dynamic factor model to identifyfinancial and monetary factors separately for each of the two economies. We find thatmonetary transmission through the Gold Standard played only a minor role in causing andpropagating the crisis, while financial distress was important. We also find evidence of crisispropagation from Germany to the U.S. via the banking channel. Banking distress in botheconomies was apparently not endogenous to monetary policy. Results confirm Bernanke's(1983) conjecture that an independent, non-monetary financial channel of crisis propagationwas operative in the Great Depression.
    Keywords: Great Depression, 1931 financial crisis, international business cycle transmission,Bayesian factor analysis, currency, banking
    JEL: N12 N13 E37 E47 C53
    Date: 2010–05

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