nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒07‒17
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Effects of education on economic growth:Evidence from Guatemala By Loening, Josef; Rao, B. Bhaskara; Singh, Rup
  2. Expenditure Efficiency and the Optimal Size of Government in Developing Countries By Yogi Rahmayanti; Theara Horn
  3. Potential Growth of Australia and New Zealand in the Aftermath of the Global Crisis By Yan Sun
  4. Economic growth and the environment By Everett, Tim; Ishwaran, Mallika; Ansaloni, Gian Paolo; Rubin, Alex
  5. The Impact of Banking Sector Stability on the Real Economy By Monnin, Pierre; Jokipii, Terhi
  6. What drives Endogenous Growth in the United States? By Dennis Wesselbaum
  7. Country-level impact of global recession and China’s stimulus package By Diao, Xinshen; Zhang, Yumei; Chen, Kevin Z.
  8. Determinants of Economic Growth: Will Data Tell? By Antonio Ciccone; Marek Jarocinski
  9. Altrusim. Education Subsidy and Growth By Armellini, Mauricio; Basu, Parantap
  10. Macroeconomic Uncertainty, Inflation and Growth: Regime-Dependent Effects in the G7 By Kyriakos C. Neanidis; Christos S. Savva
  11. Foreign inflows and growth challenges for African countries By Diao, Xinshen; Breisinger, Clemens
  12. The monetary origins of the financial and economic crisis By Landais, Bernard
  13. The Consequences of Banking Crises for Public Debt By Davide Furceri; Aleksandra Zdzienicka-Durand
  14. FDI Flows to Low-Income Countries: Global Drivers and Growth Implications By Jiro Honda; Geneviève Verdier; Amina Lahreche; Era Dabla-Norris

  1. By: Loening, Josef; Rao, B. Bhaskara; Singh, Rup
    Abstract: This paper examines the determinants of economic growth in Guatemala, with a particular focus on schooling. Results based on the error-correction methodology show a better educated labour force has a positive and significant impact on economic growth during 1951-2002. Consistent with micro evidence for Guatemala primary education is more important than secondary and tertiary education. These findings are robust while changing the conditioning variables, controlling for data issues and endogeneity. Due to social and political conflicts and the need for institutional environment conducive to growth, the growth rate of output in Guatemala has been low.
    Keywords: Economic Growth; Education; Error-Correction model; Guatemala
    JEL: C51 O54 C22
    Date: 2010–07–05
  2. By: Yogi Rahmayanti (Osaka School of International Public Policy, Osaka University); Theara Horn (Graduate School of Economics, Osaka University)
    Abstract: Government efficiency plays a significant role in the relationship between government expenditure and economic growth. Based on panel data from 63 developing countries 1990 to 2003, we calculate efficiency scores using Data Envelopment Analysis, incorporate them into a simple model of growth with government expenditure. We find that there is a critical level of efficiency required for government expenditure to have positive effect on growth. Further, above a critical level of efficiency, greater efficiency lowers the optimal size of government expenditure required to maximize growth.
    Keywords: Fiscal Policy, Government Expenditure, Public Sector Efficiency, Growth
    JEL: H50 E6 O4
    Date: 2010–07
  3. By: Yan Sun
    Abstract: Using a production function method, this paper assesses the impact of the global crisis on the potential growth of Australia and New Zealand. The two countries have not been hit hard by the global crisis, but have large net external liabilities. The paper finds that the main negative impact of the global crisis is likely to come through higher costs of capital, offset partly by a higher return to capital from strong demand for commodities by emerging Asia. It estimates medium-term potential growth of about 3 percent for Australia and 2. percent for New Zealand, higher than that of many other advanced economies.
    Keywords: Australia , Capital , Economic growth , Financial crisis , Global Financial Crisis 2008-2009 , Investment , Labor , New Zealand , Production growth , Productivity , Unemployment ,
    Date: 2010–05–26
  4. By: Everett, Tim; Ishwaran, Mallika; Ansaloni, Gian Paolo; Rubin, Alex
    Abstract: As the UK economy emerges from the downturn, attention is shifting to how best to return it to sustained and durable economic growth. But what does sustained and durable economic growth mean in the context of the natural environment? The UK and the global economy face significant environmental challenges, from averting dangerous climate change to halting biodiversity loss and protecting our ecosystems. There has been debate over whether it is possible to achieve economic growth whilst also tackling these challenges. This paper does not try to answer the question of what the sustainable level of economic growth might be, but instead examines the link between economic growth and the environment, and the role of environmental policy in managing the provision and use of natural assets. Many question the value of continued growth in GDP, given its limitations – including as a measure of wellbeing – and some evidence of its diminishing benefits within rich countries. However, it remains essential to support continued improvements in factors that affect people’s wellbeing, from health and employment to education and quality of life, and to help the government deliver on a range of policy objectives – economic, social, and environmental.
    Keywords: Environmental policy: Natural Environment: Natural Capital: Growth: Sustainable Growth:
    JEL: E62 Q56 Q58
    Date: 2010–03
  5. By: Monnin, Pierre (Swiss National Bank); Jokipii, Terhi (Swiss National Bank)
    Abstract: This article studies the relationship between the degree of banking sector stability and the subsequent evolution of real output growth and inflation. Adopting a panel VAR methodology for a sample of 18 OECD countries, we find a positive link between banking sector stability and real output growth. This finding is predominantly driven by periods of instability rather than by very stable periods. In addition, we show that an unstable banking sector increases uncertainty about future output growth. No clear link between banking sector stability and inflation seems to exist. We then argue that the link between banking stability and real output growth can be used to improve output growth forecasts. Using Fed forecast errors, we show that banking sector stability (instability) results in a significant underestimation (overestimation) of GDP growth in the subsequent quarters.
    Keywords: Banking sector stability; real output growth; output growth forecasts
    JEL: E20 E44 G21
    Date: 2010–04–01
  6. By: Dennis Wesselbaum
    Abstract: This paper estimates whether learning-by-doing effects or cleansing effects of recessions drive the endogenous component of productivity in the United States. Using Bayesian estimation techniques we find that external and internal learning-by-doing effects dominate. We find no evidence for cleansing effects of recessions. Furthermore, the exogenous component of productivity growth is close to the two percent pace
    Keywords: Business Cycles, Cleansing Effects of Recessions, Endogenous Growth, Learning-by-Doing
    JEL: C11 E32 O40
    Date: 2010–07
  7. By: Diao, Xinshen; Zhang, Yumei; Chen, Kevin Z.
    Abstract: A dynamic computable general equilibrium model is developed to assess the impact of the recent global recession and the Chinese government’s stimulus package on China’s economic growth. The model is first used to capture the actual sector-level economic growth in 2008 and the possible economic performance in 2009 without the intervention of the Chinese government through its stimulus package. Under this global recession scenario, the GDP growth rate in 2009 falls to 2.9 percent mainly as a result of the sharp drop in exports of manufactured goods, while the agricultural sector is more crisis-resilient. Because export-oriented manufacturing sectors are often import-intensive, the weakened economy is accompanied by a reduction in Chinese firms’ import demand for materials, intermediates, and capital goods. The model also shows that without government intervention, the negative effect of a one-year shock on the Chinese economy would last for many years. Also, over the next five to six years, China is unlikely to replicate its strong economic performance of the past two decades. China’s stimulus package is modeled through increased investment financed by government resources. With additional demand on investment goods, growth in the investment-related production sector is stimulated. Through the cross-sector linkages in a general equilibrium model, the demand for other noncapital goods increases, thus stimulating growth in these sectors. As production of more industrialized sectors starts to grow, so will households’ income and consumption, providing market opportunities for those agricultural and service sectors that mainly produce for the domestic market. Under the stimulus scenario, the Chinese economy is expected to grow 8–10 percent in 2009 and the succeeding years. The growth engine in this case differs from that before 2008: growth is led by domestic demand, while trade still falls significantly in 2009 (instead of the double-digit growth before 2008). Domestic demand-driven stimulus growth creates jobs, and hence it increases income for both urban and rural households. The model is also used to measure the overall gains of the stimulus package by comparing GDP between the two scenarios. Without considering the productivity-enhancing role of public investment as part of the stimulus package (which is important for long-term growth but unlikely to happen in the short run), the cumulative difference of the GDP between the two scenarios over the next seven years is about RMB76 trillion, which is about three times more than the GDP in 2007.
    Keywords: China stimulus package, Development strategies, general equilibrium modeling, global financial crisis,
    Date: 2010
  8. By: Antonio Ciccone; Marek Jarocinski
    Abstract: Many factors inhibiting and facilitating economic growth have been suggested. Can agnostics rely on international income data to tell them which matter? We find that agnostic priors lead to conclusions that are sensitive to differences across available income estimates. For example, the PWT 6.2 revision of the 1960-96 income estimates in the PWT 6.1 leads to substantial changes regarding the role of government, international trade, demography, and geography. We conclude that margins of error in international income estimates appear too large for agnostic growth empirics.
    Keywords: growth regressions, robust growth determinants, agnostic Bayesian econometrics
    JEL: E01 O47
    Date: 2010–05
  9. By: Armellini, Mauricio; Basu, Parantap
    Abstract: An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.
    Keywords: Human Capital; Altrusim; Education Subsidy;
    JEL: D90
    Date: 2010–07–03
  10. By: Kyriakos C. Neanidis; Christos S. Savva
    Abstract: We analyze the causal effects of real and nominal macroeconomic uncertainty on inflation and output growth and examine whether these effects vary with the level of inflation and location on the business cycle. Employing a bivariate Smooth Transition VAR GARCH-M model for the G7 countries during the period 1957- 2009, we find strong nonlinearities in these effects. First, uncertainty regarding the output growth rate is related with a higher average growth rate mostly in the low-growth regime, supporting the theory of “creative destruction”. Second, higher inflation uncertainty induces lower growth rates, increasingly so at the high-inflation regime. Third, real and nominal uncertainties have mixed effects on average inflation. Nevertheless, there is a trend in favour of the Cukierman- Meltzer hypothesis in the high-inflation regime. Our results can be viewed as offering an explanation for the often mixed and ambiguous findings in the literature.
    Date: 2010
  11. By: Diao, Xinshen; Breisinger, Clemens
    Abstract: Foreign inflows are important sources of income that many African governments use to finance public investments and to support the development of manufacturing or export-oriented service sectors. Yet the recent growth experience of many African economies shows that domestic-oriented industry (construction, utilities) and services have become the largest sectors. Using Ghana and its newly found oil as an example, we analyze the dynamic relationship between increasing foreign inflows and economic growth and structural change by developing a multisector intertemporal general equilibrium model. We find that the sudden increase in petrodollars used to finance either the government’s recurrent spending or public investment generates a substantial short-run growth shock consistent with the Dutch disease theory. Opposed short-run effects on the growth of the tradable and nontraded sectors lead the structure of the economy to become more domestic oriented. The creation of an oil fund helps reduce the negative growth and structural effect, while in the longer term, if oil spending does not enhance productivity, growth declines and the GDP share of the nontraded sector further increases. Smart use of oil revenue thus not only involves the creation of an oil fund but also spending inflows on productivity-enhancing investment. Whether public investments can help overcome Dutch disease effects also depends on the growth magnitude of the inflows. At the same level of investment-to-productivity-growth efficiency, public investments take longer to overcome the negative growth effects the higher the growth rate of inflows. This paper further shows that the structural effect of foreign inflows on economic development is a long-term challenge for Africa. The domestic-oriented economic structure can become a persistent phenomenon for countries that continue to receive foreign inflows in the form of petrodollars or in any other form.
    Keywords: Dutch disease, foreign inflows, Growth, intertemporal general equilibrium, structural change,
    Date: 2010
  12. By: Landais, Bernard
    Abstract: Abstract The monetary policy, especially the American one, can be blamed for the remote role (2002-2004) it played in the creation of the speculative bubble which led to a financial crisis. It also has a part of the responsibility through its restrictive direction during the 2004-2006 period; this time, a direction shared by other central banks. Finally, it is more immediately involved through its lack of clear-sightedness and responsiveness in the first months of the recession.
    Keywords: Economic crisis; Financial crisis; Monetary Policy; Taylor Rule;Taylor gap; Interest Term Spread; Recession
    JEL: E0 E58 E52
    Date: 2010–03–11
  13. By: Davide Furceri (OCDE - Organisation de coopération et de développement économiques - OCDE); Aleksandra Zdzienicka-Durand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: The aim of this paper is to assess the consequences of banking crises for public debt. Using an unbalanced panel of 154 countries from 1980 to 2006, the paper shows that banking crises are associated with a significant and long- lasting increase in government debt. The effect is a function of the severity of the crisis. In particular, we find that for severe crises, comparable to the most recent one in terms of output losses, banking crises are followed by a medium-term increase of about 37 percentage points in the government gross debt-to-GDP ratio. We also find that the debt ratio increased more in countries with a worse initial fiscal position (in terms of the gross debt-to-GDP ratio) and with a higher share of foreign debt.
    Keywords: Output Growth, Financial Crisis, CEECs
    Date: 2010
  14. By: Jiro Honda; Geneviève Verdier; Amina Lahreche; Era Dabla-Norris
    Abstract: What accounts for variations in FDI flows from advanced to developing countries? How have FDI inflows explained cross-country growth experiences? In this paper we tackle both these questions empirically for a large sample of middle and low-income countries. Two key results emerge: (i) lower borrowing costs and positive real-side external factors were increasingly important drivers of FDI outflows to low-income countries in the pre-crisis period; (ii) economic fundamentals, the strength of economic reforms, and commitment to macroeconomic discipline are crucial determinants of the growth dividends of FDI. Our paper suggests that low-income countries can turn to domestic policy solutions to mitigate the adverse effects of a potential decline in FDI in the post-crisis world.
    Date: 2010–06–01

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