nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒07‒31
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Foreign and Domestic Growth Drivers in Eastern Europe By Weber, Enzo
  2. FDI and Economic Development in China 1970-2006: A Cointegration Study By J L Ford; S Sen; Hongxu Wei
  3. China’s Economic Growth: International Spillovers By Vivek B. Arora; Athanasios Vamvakidis
  4. Asset Bubbles, Endogenous Growth, and Financial Frictions By Hirano, Tomohiro; Yanagawa, Noriyuki
  5. Inequality and Growth: Uncovering the main conclusions from the empirics By Pedro Cunha Neves; Sandra Tavares Silva
  6. Keynesian and schumpeterian efficiency in a BOP-constrained growth model By Gabriel Porcile
  7. The Phantom of the Opera: Cultural Amenities, Human Capital, and Regional Economic Growth By Falck, Oliver; Fritsch, Michael; Heblich, Stephan
  8. Costly Investment, Complementarities, International Technological-Knowledge Diffusion and the Skill Premium By Óscar Afonso; Pedro Neves; Maria Thompsom
  9. Extremal Dependence in International Output Growth: Tales from the Tails By Miguel de Carvalho; António Rua

  1. By: Weber, Enzo
    Abstract: This paper analyses the growth effects of capital formation, exports and FDI as major drivers of economic development in Eastern Europe. The fundamental innovations are identified by empirically and theoretically motivated short- and long-run restrictions in structural cointegrated vector autoregressions. Impulse responses and variance decompositions reveal quite different growth effects in various Eastern European countries. Generally, strong reliance on exports goes along with higher GDP, and FDI bears substantial potential for fostering economic growth. It is shown that the recent worldwide recession clearly hit Eastern Europe through the export channel, whereas the recovery is mainly supported by positive demand shocks.
    Keywords: Eastern Europe; Growth; Exports; Investment; Identification
    JEL: O11 C32
    Date: 2010–07–22
  2. By: J L Ford; S Sen; Hongxu Wei
    Abstract: The relationship between high levels of FDI and of economic growth has been of enduring interest in the development literature, particularly in the context of economies like China which have enjoyed exception inflows of foreign capital as well as experiencing unprecedented economic growth. The specific literature on China has failed to come to a definite conclusion as to whether FDI does increase growth mainly because they focus on one or several different channels through which FDI might affect the macro-economy. A more comprehensive framework is necessary to investigate the overarching relationships between economic development and FDI, as identified by endogenous growth theory, by including the potential influences on them, and vice-versa, of domestic capital stock, human capital, the state of technology, the openness of the economy and its gradual liberalisation. Although we investigate those influences in a VAR framework, our main focus is the presence of long-run cointegration, between the relevant variables and aggregate output in long-run equilibrium. We find, and then identify, such long run structural relationships; one of which identifies a long-run "production function". In the long-run FDI reduces economic growth; but the latter increases the former. There are important impacts on variables such as employment, from FDI and other factors such as openness and technology transfer, which have both indirect or direct spill-over effects from FDI.
    Keywords: Economic growth, FDI, endogenous growth theory, spill-over effects, VAR, impulse reponses, VEC, identified cointegration vectors, long-run relationships between growth and FDI
    JEL: O23 O24 F43
    Date: 2010–07
  3. By: Vivek B. Arora; Athanasios Vamvakidis
    Abstract: This paper presents some facts on China’s role in the world economy and measures the impact of China’s growth on growth in the rest of the world in the short and long term. Short-run estimates based on VARs and error-correction models suggest that spillover effects of China’s growth have increased in recent decades. Long-term spillover effects, estimated through growth regressions based on panel data, are also significant and have extended in recent decades beyond Asia. The estimates are robust to the effects of global and regional shocks, changes in model specification, and sample period.
    Date: 2010–07–14
  4. By: Hirano, Tomohiro; Yanagawa, Noriyuki
    Abstract: This paper analyzes the effects of bubbles in an infinitely-lived agent model of endogenous growth with financial frictions and heterogeneous agents. We provide a complete characterization on the relationship between financial frictions and the existence of bubbles. Our model predicts that if the degree of pledgeability is sufficiently high or sufficiently low, bubbles can not exist. They can only arise at an intermediate degree. This suggests that improving the financial market condition might enhance the possibility of bubbles. We also examine whether bubbles are growth-enhancing or growth-impairing in the long run. We show that when the degree of pledgeability is relatively low, bubbles boost long-run growth. On the other hand, when it is relatively high, bubbles lower long-run growth. Moreover, we examine the effects of the burst of bubbles, and show that the effects much depend on the degree of the pldgeability, i.e., the quality of financial system.
    Keywords: Asset Bubbles; Endogenous Growth; Financial Frictions
    JEL: E44
    Date: 2010–07–23
  5. By: Pedro Cunha Neves (Faculdade de Economia, Universidade do Porto, Portugal); Sandra Tavares Silva (CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: The theme of the relationship between inequality and economic growth has gained considerable attention among economists over the last two decades. In this paper, we analyse the effect of inequality on growth, whose related literature has been producing inconclusive results. After an exhaustive study of the major empirical works in this specific research area, we are able not only to advance with some potential explanations for the apparent lack of consensus on the empirical assessment of the inequality-growth relationship, but also to achieve a better understanding of the nature of this relationship and the forces underlying it. We conclude that the disparities found in the results of the estimation of the reduced-form relationship are most likely due to three dimensions: differences in the estimation techniques, the countries and the periods included in the sample, and the variable used to measure inequality. The last two aspects have particularly important implications. First, country/region specificities play a crucial role in the relationship between inequality and growth, so more emphasis should be put on the estimation of such a relationship on a national/regional basis, rather than trying to establish universal patterns. Second, the time horizon of the analysis should be carefully chosen, as different transmission channels from inequality to growth tend to operate differently in the short and in the long-run. Third, the fact that inequality in wealth distribution has a stronger negative effect on growth than inequality in income distribution may indicate that the channels through which inequality affects growth are not the same in both distributions. Therefore, we argue that in order to produce an accurate assessment of both the reduced-form relationship and the underlying transmission channels these aspects should be accordingly considered, which has not been the case in most of the empirical literature.
    Keywords: inequality, economic growth, transmission channels, income distribution, wealth distribution, taxation
    JEL: O4 D3 H2
    Date: 2010–07
  6. By: Gabriel Porcile (Department of Economics, Universidade Federal do Paraná)
    Abstract: The paper aims to contribute to the debate on specialization and growth in two forms. Firstly, it develops a North-South model in which the ratio between the income elasticity of exports and imports in the South (that gives the rate of growth compatible with external equilibrium) depends on the Keynesian and Schumpeterian efficiency of the pattern of specialization, as defined by Dosi et al (1990). The model draws on key insights of the technology gap literature to discuss how these efficiencies are related to the dynamics of technological learning. Secondly, the model is tested including the variables Keynesian and Schumpeterian efficiency in a Keynesian growth regression. Several estimation procedures are used to test the model, among which Finite Mixture Estimation, which allows for estimating the parameters for homogenous groups of countries.
    Keywords: Schumpeterian efficiency, keynesian efficiency, balance-of-payments-constrained growth, Thirlwall's Law
    JEL: O11 O33
    Date: 2010
  7. By: Falck, Oliver (Ifo Institute for Economic Research); Fritsch, Michael (University of Jena); Heblich, Stephan (Max Planck Institute for Economics)
    Abstract: We analyze the extent to which endogenous cultural amenities affect the spatial equilibrium share of high-human-capital employees. To overcome endogeneity, we draw on a quasi-natural experiment in German history and exploit the exogenous spatial distribution of baroque opera houses built as a part of rulers' competition for prestigious cultural amenities. Robustness tests confirm our strategy and strengthen the finding that proximity to a baroque opera house significantly affects the spatial equilibrium share of high-human-capital employees. Then, a cross-region growth regression shows that these employees induce local knowledge spillovers and shift a location to a higher growth path.
    Keywords: cultural amenities, regional economic growth, human capital, Bohemians
    JEL: H41 R11 J24
    Date: 2010–07
  8. By: Óscar Afonso (CEF.UP, OBEGEF, Faculdade de Economia, Universidade do Porto, Portugal); Pedro Neves (Faculdade de Economia, Universidade do Porto, Portugal); Maria Thompsom (NIPE, and Escola de Economia e Gestão da Universidade do Minho)
    Abstract: We examine the behavior of the skill premium in a two-country general equilibrium growth model assuming (i) technological-knowledge diffusion; (ii) internal costly investment in both physical capital and R&D; and (iii) complementarities between intermediate goods in production. We find that these three economic features affect the steady-state growth rate in both countries. However, only in the imitator country do they influence the skill premium. We also find that the steady-state skill premium in the innovator country is affected by its relative labor productivity rather than by its relative labor endowments. This result contrasts with most skill-biased technological change models and suggests that the sustained increase in the skill premium observed in several developed countries over the last three decades may have been due to increases in the relative productive advantage of skilled labor.
    Keywords: technological-knowledge bias, skill premium, complementarities, costly investment, technological-knowledge diffusion
    JEL: J31 O31 O33 O47
    Date: 2010–07
  9. By: Miguel de Carvalho; António Rua
    Abstract: The statistical modelling of extreme values has recently received substantial attention in a broad spectrum of sciences. Given that in a wide variety of scenarios, one is mostly concerned with explaining tail events (say, an economic recession) than central ones, the need to rely on statistical methods well qualified for modelling extremes arises. Unfortunately, several classical tools regularly applied in the analysis of central events, are simply innapropriate for the analysis of extreme values. In particular, Pearson correlation is not a proper measure for assessing the level of agreement of two variables when one is concerned with tail events. This paper explores the comovement of the economic activity of several OECD countries during periods of large positive and negative growth (right and left tails, respectively). Extremal measures are here applied as means to assess the degree of cross-country tail dependence of output growth rates. Our main empirical findings are: (i) the comovement is much stronger in left tails than in right tails; (ii) asymptotic independence is claimed by the data; (iii) the dependence in the tails is considerably stronger than the one arising from a Gaussian dependence model. In addition, our results suggest that, among the typical determinants for explaining international output growth synchronization, only economic specialization similarity seems to play a role at extreme events.<br>
    JEL: C40 C50 E32
    Date: 2010

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