nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒10‒02
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Public Capital and Growth By Fabian Bornhorst; Serkan Arslanalp; Elsa Sze; Sanjeev Gupta
  2. Institutions, Capital, and Growth By Joshua C. Hall; Russell S. Sobel; George R. Crowley
  3. Financial Development and Economic Growth in Latin America: Is Schumpeter Right? By Manoel Bittencourt
  4. Trade and economic growth : evidence on the role of complementarities for CAFTA-DR countries By Calderon, Cesar; Poggioa, Virginia
  5. Neoclassical and Keynesian View on a Growth of Economy of SR By Daniel Dujava
  6. Public Debt and Growth By Jaejoon Woo; Manmohan S. Kumar
  7. Fiscal Policy Issues for India after the Global Financial Crisis (2008-2010) By Kumar, Rajiv; Soumya, Alamuru
  8. Poverty Growth in Scandinavian Countries: A Sen Multi-decomposition By Stéphane Mussard; Maria Noel Pi Alperin
  9. Conflicts and returns to stability in developing countries : a comparative analysis By Fofack, Hippolyte
  10. On welfare criteria and optimality in an endogenous growth model By DEL REY, Elena; LOPEZ-GARCIA, Miguel ANgel
  11. Organizational Modes within Firms and Productivity Growth By Kohei Daido; Ken Tabata
  12. A Keynes-Kalecki Model of Cyclical Growth with Agent-Based Features By Mark Setterfield; Andrew Budd
  13. How Do Structural and Policy Factors Affect a Country’s Probability to Achieve the Most (or the Least) Favorable Growth Path? By Fabrizio Carmignani; Abdur Chowdhury

  1. By: Fabian Bornhorst; Serkan Arslanalp; Elsa Sze; Sanjeev Gupta
    Abstract: This paper estimates the impact of public capital on economic growth for forty-eight OECD and non-OECD countries during 1960 - 2001. Using the production function and its extensions, it finds a positive - but concave - elasticity of output with respect to public capital, which is robust to changes in time intervals and varying depreciation rates. Furthermore, in non-OECD countries the growth impact of public capital is higher once longer time intervals are considered.
    Keywords: Capital , Cross country analysis , Economic growth , Economic models , Public investment ,
    Date: 2010–07–29
  2. By: Joshua C. Hall (Department of Economics and Management, Beloit College); Russell S. Sobel (Department of Economics, West Virginia University); George R. Crowley (Department of Economics, West Virginia University)
    Abstract: The international development community has encouraged investment in physical and human capital as a precursor to economic progress. Recent evidence shows, however, that increases in capital do not always lead to increases in output. We develop a growth model where the allocation and productivity of capital depends on a country's institutions. We find that increases in physical and human capital lead to output growth only in countries with good institutions. In countries with bad institutions, increases in capital lead to negative growth rates because additions to the capital stock tend to be employed in rent-seeking and other socially unproductive activities.
    Keywords: Institutions, Capital, and Growth
    JEL: B53 O10 I2
    Date: 2010
  3. By: Manoel Bittencourt
    Abstract: In this paper we investigate the role of financial development, or more wide-spread access to finance, in generating economic growth in four Latin American countries between 1980 and 2007. The results, based on panel time-series data and analysis, con.rm the Schumpeterian prediction which suggests that finance authorises the entrepreneur to invest in productive activities, and therefore to promote economic growth. Furthermore, given the characteristics of the sample of countries chosen, we highlight the importance of macroeconomic stability, and all the institutional framework that it encompasses, as a necessary pre-condition for financial development, and consequently for sustained growth and prosperity in the region.
    Keywords: Finance, growth, Latin America
    JEL: E31 N16 O11 O54
    Date: 2010
  4. By: Calderon, Cesar; Poggioa, Virginia
    Abstract: This paper examines the effects of trade on growth among Central America-Dominican Republic Free Trade Agreement countries. To accomplish this task, the authors collected a panel data set of 136 countries over 1960-2010, and estimated cross-country growth regressions using an econometric methodology that accounts for unobserved effects and the likely endogeneity of the growth determinants. Following recent empirical efforts, they tested whether the impact of trade openness on growth may be more effective after surpassing a"minimum threshold"in specific areas closely related to economic development. The analysis finds not only that there is a robust causal link from trade to growth, but also that the growth benefits from trade are larger in countries with higher levels of education and innovation, deeper financial markets, a stronger institutional framework, more developed infrastructure networks, a high level of integration with world capital markets, and less stringent economic regulations. On average, rising trade has benefited growth in Central America-Dominican Republic Free Trade Agreement countries. However, the lack of progress in structural reforms has not allowed these countries to maximize the potential benefits from trade.
    Keywords: Economic Theory&Research,Free Trade,Achieving Shared Growth,Emerging Markets,Trade Policy
    Date: 2010–09–01
  5. By: Daniel Dujava (Institute of Economic Research SAS, Slovak Academy of Sciences)
    Abstract: In the study we focus on theoretical and practical aspects of neoclassical models of economic growth, i.e. Sollow-Swan model and Ramsey-Cass-Koopmans model and keynesian Kaldor model. We explain theory of Sollow-Swan model and calibrate parameters of the model according to economy of the Slovak Republic. We compare Sollow-Swan model to Kaldor model and estimate main functions of Kaldor model for the economy of the SR. We explain means of making propensity to save endogenous in Ramsey-Cass-Koopmans model and we examine whether endogenous propensity is useful in describing economy of SR.
    Keywords: Economic growth, Harrod-Domar model, Kaldor model, Ramsey-Cass-Koopmans model, Sollow-Swan model, technology growth
    JEL: B22 E20 O11
    Date: 2010–09–21
  6. By: Jaejoon Woo; Manmohan S. Kumar
    Abstract: This paper explores the impact of high public debt on long-run economic growth. The analysis, based on a panel of advanced and emerging economies over almost four decades, takes into account a broad range of determinants of growth as well as various estimation issues including reverse causality and endogeneity. In addition, threshold effects, nonlinearities, and differences between advanced and emerging market economies are examined. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Analysis of the components of growth suggests that the adverse effect largely reflects a slowdown in labor productivity growth mainly due to reduced investment and slower growth of capital stock.
    Keywords: Capital , Economic growth , Gross domestic product , Labor productivity , Low-income developing countries , Public debt ,
    Date: 2010–07–28
  7. By: Kumar, Rajiv (Asian Development Bank Institute); Soumya, Alamuru (Asian Development Bank Institute)
    Abstract: The need for fiscal consolidation and sustainability is one of the key macroeconomic issues confronting Indian economy. This paper attempts to understand India's current fiscal situation, its likely future development, and its impact on the economy in the context of a weak global recovery from the current crisis. The impact of the global crisis has been transmitted to the Indian economy through three distinct channels, namely: the financial sector, exports, and exchange rates. The other significant channel of impact is the slump in business and consumer confidence leading to decrease in investment and consumption demand. The Indian government, to boost the demand, has announced several stimulus packages. However, there is not much room for further fiscal policy action as the consolidated fiscal deficit of the central and state governments in 2009-2010 is already about 11% of the gross domestic product (GDP). Any further increase in the fiscal deficit to GDP ratio could invite a sharp downgrading of India's credit rating and a loss of business confidence. The paper reviews the existing theories on the relationship between fiscal deficit and growth. It also analyzes the past trends and policy measures to understand the possible implications for economic recovery and long run growth in the Indian context. It also provides a long-term forecast of the fiscal deficit and public debt burden based on the past trends. Finally, the paper suggests a set of policy measures to get the Indian economy back on the path of sustained rapid and inclusive growth.
    Keywords: indian public finance; global financial crisis; deficit forecasts; fiscal policies
    JEL: E62 H20 H60
    Date: 2010–09–17
  8. By: Stéphane Mussard; Maria Noel Pi Alperin
    Abstract: We show in this paper that the growth rate of the Sen index is multi-decomposable, that is, decomposable simultaneously by groups and income sources. The multi-decomposition of the poverty growth yields respectively: the growth rate of the poverty incidence (poverty rate) decomposed by groups, the growth rate of the poverty depth (poverty gap ratios) decomposed by sources and groups, and the growth rate of inequality decomposed by sources and groups. We demonstrate that the multi-decomposition is not unique. It is mainly dependent on poverty lines defined on the space of income sources. An application to Scandinavian countries shows that poverty lines based on non-correlation between the sources of incomes imply serious underestimation of the contribution levels of the different components of the global poverty growth. The main contribution of our paper is to pay a particular attention to the poverty growth and its source components in order to avoid underestimation of poverty growth.
    Date: 2010–09
  9. By: Fofack, Hippolyte
    Abstract: Sub-Saharan Africa's dismal development outcomes -- growth collapse and declining real income -- are often used to highlight its sharp development contrast with other regions of the developing world. Drawing on a large cross-section analysis, this paper shows that Africa's underlying dismal records can also be largely accounted for by the skewed distribution of growth in the post-independence era. In particular, structurally low investment rates in a context of high political risk and uncertainty undermined growth prospects in the region. However, counterfactual simulations based on a variation of neoclassical growth models and under the hypothetical equalization of political risk profile alternative result in large economic returns, reflected in the significantly higher level of aggregate output and income in the subset of conflict-affected countries. Income gets even higher when the hypothetical reduction of political risks alternative is accompanied by sustained increases in capital accumulation.
    Keywords: Economic Theory&Research,Post Conflict Reconstruction,Achieving Shared Growth,Emerging Markets,Debt Markets
    Date: 2010–09–01
  10. By: DEL REY, Elena (Universitat de Girona, Spain); LOPEZ-GARCIA, Miguel ANgel (Universitat Autonoma de Barcelona, Spain)
    Abstract: In this paper we explore the consequences for optimality of a social planner adopting two different welfare criteria. The framework of analysis is an OLG model with physical and human capital. We first show that, when the SWF is a discounted sum of individual utilities defined over consumption per unit of natural labour, the precise cardinalization of the individual utility function becomes crucial for the characterization of the social optimum. Also, decentralizing the social optimum requires an education subsidy. In contrast, when the SWF is a discounted sum of individual utilities defined over consumption per unit of efficient labour, the precise cardinalization of preferences becomes irrelevant. More strikingly, along the optimal growth path, education should be taxed.
    Keywords: endogenous growth, human capital, intergenerational transfers, education policy
    JEL: D90 H21 H52 H55
    Date: 2010–05–01
  11. By: Kohei Daido (School of Economics, Kwansei Gakuin University); Ken Tabata (School of Economics, Kwansei Gakuin University)
    Abstract: This paper develops a simple growth model with moral hazard contracting to examine the interactions between the organizational mode of firms and economic productivity growth. The organizational mode of firms differs in terms of the degree to which decisions of R&D investment are delegated to a manager. We show that the market size restricts the extent of delegation with respect to R&D, which in turn determines the productivity growth rate of the economy. We then show that there exist multiple equilibria: gpartial decentralization equilibriumh with a low growth rate and gfull decentralization equilibriumh with a high growth rate. Finally, we study the effects of social capital and competition on equilibrium organizational modes and show that, under some parametric conditions, these factors induce more decentralized organization and higher productivity growth while lowering the risk of the economy converging to a poverty trap.
    Keywords: Centralization and Decentralization, Moral Hazard, Social Capital, Multiple Equilibria, Economic Growth, Competitive Policy
    JEL: D86 L16 L22 O32 O40
    Date: 2010–09
  12. By: Mark Setterfield (Department of Economics, Trinity College); Andrew Budd (Sloan School of Management, MIT)
    Abstract: Throughout his career, Malcolm Sawyer has both encouraged and contributed to the development of a Kaleckian alternative to conventional macroeconomic theory. In the spirit of this endeavour, we construct a Keynes-Kalecki model of cyclical growth with agent-based features. Our model is driven by heterogeneous firms who, confronting an environment of fundamental uncertainty, revise their “state of long run expectations” in response to recent events. Model simulations generate fluctuations in the rate of growth that are aperiodic and of variable amplitude. We also study the size distribution of firms resulting from our simulations, finding evidence of a power law distribution that we have no reason to anticipate from the basic structure of our model. Finally, we reflect on the potential advantages of combining aggregate structural modelling with some of the methods and practices of agent-based computational economics.
    Keywords: Kaleckian model, growth, cycles, agent-based computational economics
    JEL: E12 E32 E37 O41
    Date: 2010–09
  13. By: Fabrizio Carmignani (School of Economics, University of Queensland, Australia); Abdur Chowdhury (Department of Economics Marquette University)
    Abstract: We ask which economic policies can help a country create the most favourable conditions for development. We observe that the dynamics of several development indicators can be grouped into four clusters, each cluster corresponding to a different combination of growth and changes in inequality. Based on this observation, we define four different development scenarios and use limited dependent variable regressions to study how structural and policy factors affect a country’s probability to achieve the most (or the least) favourable of these scenarios. Our results point to a comforting picture: through the choice of appropriate policies countries can effectively increase their chances to achieve the most favourable development scenarios.
    Keywords: Development, Inequality, Growth, Economic Policy, Limited dependent variables
    JEL: I30 O15 O40 C25
    Date: 2010–09

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