nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒08‒06
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Mexico and Singapore: Partners for Growth: Sharing the Economic Crisis Experience By H.E. Ms. Green
  2. Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence By Andrea Vaona
  3. A Simultaneous Equation Model of Economic Growth, FDI and Government Policy in China By J L Ford; S Sen; Hongxu Wei
  4. Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe By Nikolov, Pavel
  5. Innovation and Economic Growth in China By Yanrui Wu
  6. The International Effects of China's Growth, Trade and Ecucation Booms By Richard G. Harris; Peter E. Robertson; Jessica Y. Xu
  7. Is tolerance good or bad for growth? By Berggren, Niclas; Elinder, Mikael
  8. Promoting Potential Growth: The Role of Structural Reform By Luiz de Mello; Pier Carlo Padoan

  1. By: H.E. Ms. Green
    Abstract: This paper is a lecture series by H.E. Ms. Rosario Green, who shares the economic crisis experience of Mexico and Singapore, who are also partners for growth.
    Keywords: economic crisis, Mexico, Singapore, partners, growth
    Date: 2010
  2. 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
  3. By: J L Ford; S Sen; Hongxu Wei
    Abstract: Empirical investigations aimed at determining what relationship, if any, exists between FDI and economic growth has drawn ambiguous results. This is also the case for China, where all empirical studies have used the VAR methodology. In this study we outline a dynamic simultaneous equations model. The model captures the interrelationships between, aggregate output, domestic capital, FDI, human capital, and the state of technological development. As well as broadening the formulation of the production function, the model is defined to include possible influences from government capital expenditure on the infrastructure. Structural equations are then developed to determine those variables, and further factors are introduced into the model thereby, such as saving and wealth, and other exogenuous policy variables. The latter embrace monetary, commerical and fiscal policy. Two of the potential influences on the system, and hence upon economic development, are financial liberalisation and the general opening-up of the Chinese economy, since 1979. The dynamic multipliers from the estimated model indicate, amongst other things, that the general set of economic reforms has beneficial impact on long-run economic growth, directly and indirectly by its enhancement of FDI.
    Keywords: Economic growth factors, FDI, spill-over effects of FDI, monetary policy, commercial policy, fiscal policy, "opening out" reforms, GMM estimates, multipliers
    JEL: O23 O24 F23
    Date: 2010–07
  4. By: Nikolov, Pavel
    Abstract: This paper examines the relationship between adverse shocks to the banking system and their effect on the general economy in Europe. This topic was brought to the spotlight during the 2007-2009 financial and economic crisis, when the relatively healthy, at that time, European economy was severely hit by the spread of the US sub-prime mortgage problems. This interbanking contagion may have been one of the main, if not the primary, reasons why the region entered into a recession during the period. If significant evidence can be found to support this theory, it will make the need for more regulations on the financial system and stricter capital requirements even more apparent. The research includes comprehensive literature survey on past and recent financial crises, procyclical banking practices and their impact on the economy. Then it goes on to developing a theoretical model of the transmission of negative economic shocks from the financial system to the rest of the economy. The theoretical model is empirically tested on a range of banking specific and macroeconomic variables. The results show that a loss of confidence in the financial system and banking losses are followed by a significant decrease in the new loans to non-financial companies and subsequent economic contraction. Moreover, countries with better capitalized banks experienced smaller declines during the crisis and in general Tier 1 capital is correlated positively with economic growth.
    Keywords: economic shocks, financial crisis, banking system stability, procyclical effects
    JEL: E0 E32 E5
    Date: 2010–06–11
  5. By: Yanrui Wu (UWA Business School, The University of Western Australia)
    Abstract: China has enjoyed high economic growth for three decades since the initiative of economic reform in 1978. This growth has however been driven mainly by labour-intensive, export-oriented manufacturing activities. Has innovation played a role in China’s economic growth? What are the determinants of innovation in the Chinese economy? These are some of the questions which are to be explored in this study. Answers to these questions have important policy implications for China’s economic development in the future as innovation is vital for the transformation of the country’s growth model.
    Keywords: Innovation, economic growth, Chinese economy
    Date: 2010
  6. By: Richard G. Harris (Simon Fraser University); Peter E. Robertson (UWA Business School, The University of Western Australia); Jessica Y. Xu (The University of New South Wales)
    Abstract: China’s international trade flows have increased by 500% since 1992, far outstripping GDP growth. Likewise tertiary education enrollments have increased by 300%. We simulate these changes using a multi-sector growth model of the Chinese and USA economies. A decade of trade biased growth in China is found to have a large effect on the USA economy – raising GDP approximately 3-4.5 percentage points. We also show that the trade bias in China’s growth accounts for more than half of the observed growth in tertiary enrolments in China. In contrast neutral growth has practically no effect on USA incomes or China’s stock of skilled labour. Finally the simulations reveal that China’s education boom per se has practically no long run impact on the USA economy. The results thus indicate that the pattern of productivity growth in exports sectors, as might be caused by falling trade costs, has been critical in transmitting benefits of Chinese growth to the world economy. They also point to an important link between falling trade costs and human capital formation.
    Keywords: Economic Growth, China, Human Capital, Trade Costs
    Date: 2010
  7. By: Berggren, Niclas (The Ratio Institute); Elinder, Mikael (Department of Economics, Uppsala University)
    Abstract: We investigate to what extent tolerance, as measured by attitudes toward different types of neighbors, affects economic growth. Data from the World Values Survey enable us to investigate tolerance–growth relationships for 54 countries. We provide estimates based on cross-sectional as well as panel-data regressions. In addition we test for robustness with respect to model specification and sample composition. Unlike previous studies, by Richard Florida and others, we find that tolerance toward homosexuals is negatively related to growth. For tolerance toward people of a different race, we do not find robust results, but the sign of the estimated coefficients is positive, suggesting that inclusion of people irrespective of race makes good use of productive capacity. We propose mechanisms to explain these divergent findings, which clarify why different kinds of tolerance may be of different economic importance.
    Keywords: Tolerance; Growth; Diversity; Human Capital; Creativity; Innovation
    JEL: O40 Z13
    Date: 2010–08–02
  8. By: Luiz de Mello; Pier Carlo Padoan
    Abstract: The global crisis has left many G20 countries with an unenviable legacy of lower potential output and high government indebtedness. Global imbalances, which had narrowed during the recession, are now beginning to widen again, as the recovery takes hold. Structural reform will be needed not only to recover the crisis-driven output loss and to maintain it in the longer term, but also to put the public finances back on a sustainable path and to rebalance global growth. To contribute to the policy debate, this paper summarises the analysis carried out by the OECD on the effects of a host of structural reforms on GDP growth, public finances and external current account balances.<P>Promouvoir la croissance potentielle : Le rôle des réformes structurelles<BR>La crise mondiale a légué à de nombreux pays du G20 une production potentielle plus faible et un endettement public plus important. Les déséquilibres de la balance courante, qui avaient diminué pendant la récession, recommencent désormais à augmenter au fur et à mesure que la reprise prend forme. Des réformes structurelles seront nécessaires non seulement pour récupérer la perte de production potentielle due à la crise et la maintenir à plus long terme, mais aussi pour remettre les finances publiques sur une trajectoire soutenable et rééquilibrer la croissance mondiale. Ce document contribue au débat de politique économique en résumant l'analyse effectuée par l'OCDE sur les effets des réformes structurelles sur la croissance du PIB, les finances publiques et les déséquilibres de la balance courante.
    Keywords: structural reforms, potential output, global imbalances, réforme structurelle, déséquilibres globaux, produit potentiel
    JEL: F30 J8 O40
    Date: 2010–07–20
  9. By: Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper reviews the background and key policy challenges of the current situation of the Spanish economy. It describes the strengths and weaknesses of Spain's recent long growth cycle, the real and financial imbalances accumulated towards its end, and the troubles faced at the current stage. Particular attention is paid to the developments in private and public sector finances and, specifically, to their implications for the banking sector. Attention is also paid to the political-economy background, especially in regards to the undertaking of structural reforms. It is argued that recent external pressure, partly initiated by unjustified catastrophic expectations about Spain, provides an opportunity for accelerating the reforms needed to resumen strong growth.
    Date: 2010–07

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