nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒09‒11
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Country size, growth and volatility By Olfa Alouini; Paul Hubert
  2. Assessing the Parfit's Repugnant Conclusion within a canonical endogenous growth set-up By Raouf BOUCEKKINE; Giorgio FABBRI
  3. Neoliberalism’s relationship with economic growth in the developing world: Was it the power of the market or the resolution of financial crisis? By Cohen, Joseph N
  4. Foreign Direct Investment and Economic Growth: A real relationship or wishful thinking? By Hristos Doucouliagos; Sasi Iamsiraroj; Mehmet Ali Ulubasoglu
  5. Endogenous Time Preference in Monetary Growth Model By Been-Lon Chen; Yu-Shan Hsu; Chia-Hui Lu
  6. Country Role Models: Synthesis of Ireland, Japan and Switzerland By Ronald Findlay
  7. The effects of US economic and financial crises on euro area convergence By Fabio C. Bagliano; Claudio Morana
  8. Migration, Skill Composition and Growth By Lotti, E.; Young-Bae, K.; , Levine; P.,
  9. Inflation, inflation uncertainty and growth: are they related ? By Stilianos Fountas
  10. Is foreign trade important for regional growth? Empirical evidence from Portugal By Elias Soukiazis; Micaela Antunes
  11. A Note on Balanced Growth with a less than Unitary Elasticity of Substitution By Miguel A. Leon-Ledesma; Mathan Satchi
  12. How Better Monetary Statistics Could Have Signaled the Financial Crisis By William A. Barnett; Marcelle Chauvet
  13. The effects of bank capital on lending: What do we know, and what does it mean? By Jose M. Berrospide; Rochelle M. Edge

  1. By: Olfa Alouini (Observatoire Français des Conjonctures Économiques); Paul Hubert (Observatoire Français des Conjonctures Économiques)
    Date: 2010–07
  2. By: Raouf BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), CORE and University of Glasgow, Scotland); Giorgio FABBRI (Dipartimento di Studi Economici S. Vinci, Universita di Napoli Parthenope)
    Abstract: Parfit's Repugnant Conclusion stipulates that under total utilitarianism, it might be optimal to choose increasing population size while consumption per capita goes to zero. We evaluate this claim within a canonical AK model with endogenous fertility and a reduced form relationship between demographic growth and economic growth. While in the traditional linear dilution model, the Parfit Repugnant Conclusion can never occur for realistic values of intertemporal substitution, we show that it occurs when population growth is linked to economic growth via an inverted U-shaped relationship. Finally, we find moving from the Benthamite to the Millian social welfare function may not only cause optimal population size to go up and consumption to go down, it may also favor the realization of the Repugnant Conclusion.
    Keywords: Parfit's Repugnant Conclusion, AK models, endogenous fertility, intertemporal altruism
    JEL: O41 I20 J10
    Date: 2010–07–13
  3. By: Cohen, Joseph N
    Abstract: This article examines the relationship between "economic freedom" and economic growth. Previous studies have found a positive relationship between economic growth rates and "economic freedom", and used this relationship as a basis for arguing that more liberal economic policies promote development. "Economic freedom" conflates laissez-faire policy with other important concepts, like good governance and macroeconomic stability. When laissez-faire is parsed from these other concepts, it shows no positive relationship with growth outside of the early-1990s, a period in which financially-strained developing governments and financial systems enjoyed debt bailouts in exchange for liberalization reforms. Further analysis shows that laissez-faire exerts no discernible effect on economic growth net of the debt relief, inflation containment and improved inward investment that occurred after the Cold War. I argue that free market capitalism itself may not have promoted economic development in the post-Cold War era. Instead, free market reforms occurred alongside domestic and international political developments that helped developing countries resolve a serious financial crises, and that the resolution of these crises were most important in explaining the comparative prosperity of the 1990s and 2000s.
    Keywords: economic freedom; neoliberalism; laissez faire; periodicity; economic growth; economic development; capitalism
    JEL: P11 P17 O21 E61 O4
    Date: 2010–07–15
  4. By: Hristos Doucouliagos; Sasi Iamsiraroj; Mehmet Ali Ulubasoglu
    Abstract: The macroeconomic impact of FDI has been a longstanding source of debate. This paper provides a comprehensive assessment of the empirical evidence accumulated over the past three decades on the effects of FDI on economic growth. Meta-regression analysis is applied to 880 estimates of this effect from 108 empirical studies. This analysis reveals that FDI has overall a positive effect on growth. Compared to North America, the growth effect of FDI is larger in Western Europe and is weaker in the Middle East and South East Asia. The positive effect of FDI on growth is amplified when FDI interacts with financial development, trade, and human capital. Finally, higher levels of FDI are associated with larger governments, more developed financial markets, lower inflation, higher levels of schooling, and higher levels of foreign aid.
    Keywords: FDI, economic growth, meta-regression analysis
    JEL: F21 F4
    Date: 2010–08–25
  5. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Yu-Shan Hsu (Department of Economics, National Chung Cheng University); Chia-Hui Lu (Department of Economics, National Taipei University)
    Abstract: We study the otherwise standard growth model with money except endogenous time preferences determined by resources pent on imagining future pleasures along the line of Becker and Mulligan (1997). Money plays a role in transactions via the cash-in-advance constraint.The resulting steady-state condition can be simplified to the standard textbook diagram in terms of two loci. We analyze the relationship between monetary growth and capital accumulation. If spending on imagining future pleasures is not constrained by cash, the existing relationship no longer holds. The optimum quantity of money is studied.
    Keywords: endogenous time preferences, growth, money
    JEL: E22 E31
    Date: 2010–09
  6. By: Ronald Findlay
    Abstract: This paper provides a synthesis of the three papers on the non-Nordic developed economies, Ireland, Japan and Switzerland along the following themes: role of the state, openness, education and human capital, and macroeconomic stability. It then draws lessons for developing countries of today.
    Keywords: economic growth, economic development, industrialization, Ireland, Japan, Switzerland
    Date: 2010
  7. By: Fabio C. Bagliano (Department of Economics and Public Finance "G. Prato", University of Torino); Claudio Morana (Department of Economics and Quantitative Methods, University of Eastern Piedmont)
    Abstract: As economic and financial integration between the US and the euro area is strong, assessing whether the recent US crisis may affect the process of real and nominal convergence within the euro area is important. The paper addresses this issue in the framework of a large-scale open economy macroeconometric model, featuring 14 euro area member countries, the USA, and 35 advanced and emerging economies. The results point to a likely contribution of US economic and financial crises to real divergence in the euro area, potentially affecting first, second and third moments of the output growth distribution; on the other hand, implications for nominal convergence are less clearcut.
    Keywords: Euro area convergence, Great Recession, financial crisis, economic crisis, factor vector autoregressive models
    JEL: C22 E32 F36
    Date: 2010–09
  8. By: Lotti, E.; Young-Bae, K.; , Levine; P.,
    Abstract: The UK, with its relatively liberal immigration policies following recent enlargements, has been one of the main recipients of migrants from new EU member states. This paper poses the questions: what is the effect of immigration on a receiving economy such as the UK? Is the effect beneficial or adverse for growth? How differently would skilled (or unskilled) migration affect both receiving and sending economies? What factors would contribute to immigration/emigration benefits/costs and economic growth driven by migration? Who are the winners and losers in both the sending and host regions? We utilize an endogenous growth two-bloc model with labour mobility of different skill compositions to address these questions. We show that migration, in general, is beneficial to the receiving country and increases the world growth rate. With remittances, the sending country in aggregate can also benefit. The only exception is in the case of unskilled migration, which can actually have a detrimental impact on the world growth rate. Winners are migrants, and the skill group in the region that sees its relative size decrease. <br><br> Keywords; Migration, Labour mobility, Skill composition, Economic growth. <br><br> JEL Classification: F22, F43, J24, J61, O41
    Date: 2010–08–01
  9. By: Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: We examine the relationship between inflation uncertainty, inflation and growth using annual historical data on industrial countries covering in many cases more than one century. Proxying inflation uncertainty by the conditional variance of inflation shocks, we obtain the following results. (1) There is significant evidence for the positive effect of inflation uncertainty on inflation supporting the Cukierman-Meltzer hypothesis. (2) There is mixed evidence on the causal effect of inflation on inflation uncertainty. (3) There is strong evidence that inflation uncertainty is not detrimental to output growth.
    Keywords: Inflation uncertainty, growth, GARCH models
    JEL: E31 O40
    Date: 2010–12
  10. By: Elias Soukiazis (GEMF/Faculdade de Economia, Universidade de Coimbra, Portugal); Micaela Antunes (Faculdade de Economia, Universidade de Coimbra, Portugal)
    Abstract: Both the neoclassical approach associated to the Solow’s exogenous growth model and the endogenous growth theories have been criticised for being more consistent with a closed economy. In these approaches, the effects of international trade on growth and the trade deficits are not explicitly considered as impediments to economic expansion. The aim of this study is to contribute to the debate, investigating whether openness, exports share or trade balances affect regional growth in Portugal. In combination with external trade indicators, human capital is also considered as a conditional factor to growth, expressed by the rate of success in high school education. Thus, we analyse whether the combination of international trade measures and human capital is relevant to explaining regional growth in Portugal and how it affects the convergence process between regions. Additionally, interaction terms are considered to explore the existence of different performances between regions of the Littoral and the Interior zones. As an alternative to the traditional approach that considers the population growth rate, we include the share of the industrial employment as an indicator of regional specialisation. The empirical analysis estimates the conditional convergence model of the Barro’s type, applied to the Portuguese NUTS3 regions for the period 1996-2005. The estimation approach based on regional panel data and using the GMM estimation technique reveals that factors associated to external trade, human capital and reallocation of resources to more productive sectors (industry) are relevant to explain regional growth and convergence in Portugal.
    Keywords: conditional convergence, human capital, external trade, employment share in industry, GMM regressions, panel data.
    JEL: E12 F43 O11
    Date: 2010–07
  11. By: Miguel A. Leon-Ledesma; Mathan Satchi
    Abstract: We present a simple production technology in which the choice of production technique results in a balanced growth path even in the presence of capital-augmenting technical progress. Given a particular choice of technique, the production function is CES with a less than unitary elasticity of factor substitution. The form of this production technology is also invariant to the choice of units, allowing us to abstract from the normalization considerations that often accompany the use of CES. The approach yields a balanced growth path but short-run time-varying factor shares without requiring an explicit model of the R&D sector.
    Keywords: Balanced growth; capital-augmenting technical progress, measurement units, elasticity of substitution
    JEL: E25 O33 O40
    Date: 2010–08
  12. By: William A. Barnett (Department of Economics, The University of Kansas); Marcelle Chauvet (University of California at Riverside)
    Abstract: This paper explores the disconnect of Federal Reserve data from index number theory. A consequence could have been the decreased systemic-risk misperceptions that contributed to excess risk taking prior to the housing bust. We find that most recessions in the past 50 years were preceded by more contractionary monetary policy than indicated by simple-sum monetary data. Divisia monetary aggregate growth rates were generally lower than simple-sum aggregate growth rates in the period preceding the Great Moderation, and higher since the mid 1980s. Monetary policy was more contractionary than likely intended before the 2001 recession and more expansionary than likely intended during the subsequent recovery.
    Keywords: Measurement error, monetary aggregation, Divisia index, aggregation, monetary policy, index number theory, financial crisis, great moderation, Federal Reserve.
    JEL: E40 E52 E58 C43 E32
    Date: 2010–08
  13. By: Jose M. Berrospide; Rochelle M. Edge
    Abstract: The effect of bank capital on lending is a critical determinant of the linkage between financial conditions and real activity, and has received especial attention in the recent financial crisis. We use panel-regression techniques—following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994)—to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan’s (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial-bank assets and leverage growth, which have recently been very influential in shaping forecasters’ and policymakers’ views regarding the effects of bank capital on loan growth. Our estimated models are then used to understand recent developments in bank lending and, in particular, to consider the role of TARP-related capital injections in affecting these developments.
    Date: 2010–09

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