nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒10‒09
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Economic Growth and Environmental Policy with Short-lived Governments By Itziar Lazkano; Francisco M Gonzalez; Sjak Smulders
  2. Does Government Expenditure on Education Promote Economic Growth? An Econometric Analysis By Abhijeet, Chandra
  3. China : global crisis avoided, robust economic growth sustained By Vincelette, Gallina Andronova; Manoel, Alvaro; Hansson, Ardo; Kuijs, Louis
  4. The ASEAN Services Sector and the Growth Rebalancing Model By Rafaelita M. Aldaba; Gloria O. Pasadilla
  5. Culture, Institutions and the Wealth of Nations By Gorodnichenko, Yuriy; Roland, Gerald
  6. Growth and Welfare under Endogenous Lifetime By Maik T. Schneider; Ralph Winkler
  7. Financial Crisis, Financial Integration and Economic Growth: The European Case By Maudos Villarroya Joaquín; Fernández de Guevara Radoselovics Juan
  8. Uncertainty in the Public Debt Market and Stochastic Long-Run Growth By Panagiotis Tsintzos; Theologos Dergiades
  9. Short-run and Long-run Dynamics of Growth,Inequality and Poverty in the Developing World By Thomas Gries; Margarete Redlin
  10. Distributions in motion: Economic growth, inequality, and poverty dynamics By Francisco Ferreira
  11. Debt Policy in a Competitive Two-Sector Overlapping Generations Model By Partha Sen
  12. 10-05 "The Macroeconomics of Development without Throughput Growth" By Jonathan M. Harris
  13. Inequality and Growth: The Neglected Time Dimension By Halter, David; Oechslin, Manuel
  14. Sustainable Economic Growth for India: An Exercise in Macroeconomic Scenario Building By V. Pandit

  1. By: Itziar Lazkano; Francisco M Gonzalez; Sjak Smulders
    Date: 2010–01–29
  2. By: Abhijeet, Chandra
    Abstract: Education being an important component of human capital has always attracted the interests of economists, researchers and policy makers. Governments across the globe in general and in India in particular are trying to improve the human capital by pumping more investments in education. But the issue that whether improved level of education resulting from more education spending can promote economic growth is still controversial. Some economists and researchers have supported the bi-directional relation between these two variables, while it has also been suggested that it is the economic growth that stimulates governments spend more on education, not the other way. Considering this research issue, the present paper uses linear and non-linear Granger Causality methods to determine the causal relationship between education spending and economic growth in India for the period 1951-2009. The findings of this paper indicate that economic growth affects the level of government spending on education irrespective of any lag effects, but investments in education also tend to influence economic growth after some time-lag. The results are particularly useful in theoretical and empirical research by economists, regulators and policy makers.
    Keywords: Education expenditure; Economic growth; Indian economy; Granger Causality; Non-linearity.
    JEL: E62 I21 C22 H52
    Date: 2010–08
  3. By: Vincelette, Gallina Andronova; Manoel, Alvaro; Hansson, Ardo; Kuijs, Louis
    Abstract: This paper explores how the ongoing crisis, the policy responses to it, and the post-crisis global economy will impact China's medium-term prospects for growth, poverty reduction, and development. The paper reviews China's pre-crisis growth experience, including its relationship to global economic developments. It discusses the pace, composition, sources, and financing of growth during 1995-2007, and the impact of key external and domestic influences. The paper also analyzes the immediate impact of the global crisis on China's economic performance in 2009 and its likely impact in the short run. It then discusses the government's policy response, with a particular focus on the fiscal and monetary stimulus measures. Finally, the paper explores China's medium-term growth prospects in light of the crisis and the key policies for moving to a robust and sustainable growth path post-crisis.
    Keywords: Debt Markets,Economic Theory&Research,Emerging Markets,Currencies and Exchange Rates,Access to Finance
    Date: 2010–09–01
  4. By: Rafaelita M. Aldaba; Gloria O. Pasadilla
    Abstract: The growth rebalancing model, which places the nontradable services sector on center stage, is important to spur on faster growth in this sector and tap its potential to become another engine of growth for ASEAN economies. While ASEAN countries have allocated the bulk of their fiscal stimulus packages to infrastructure spending, the present levels are nevertheless considered insufficient to create a large impact on growth. By focusing on the provision of infrastructure and social services like power, ports, roads, and mass transit, along with health and education, governments can address the large investment backlogs in these sectors. [ADBI Working Paper 246]
    Keywords: model, nontradable, services sector, center stage, ASEAN, fiscal, stimulus packages
    Date: 2010
  5. By: Gorodnichenko, Yuriy (University of California, Berkeley); Roland, Gerald (University of California, Berkeley)
    Abstract: We construct an endogenous growth model that includes a cultural variable along the dimension of individualism-collectivism. The model predicts that more individualism leads to more innovation because of the social rewards associated with innovation in an individualist culture. This cultural effect may offset the negative effects of bad institutions on growth. Collectivism leads to efficiency gains relative to individualism, but these gains are static, unlike the dynamic effect of individualism on growth through innovation. Using genetic data as instruments for culture we provide strong evidence of a causal effect of individualism on income per worker and total factor productivity as well as on innovation. The baseline genetic markers we use are interpreted as proxies for cultural transmission but others have a direct effect on individualism and collectivism, in line with recent advances in biology and neuro-science. The effect of culture on long-run growth remains very robust even after controlling for the effect of institutions and other factors. We also provide evidence of a two-way causal effect between culture and institutions.
    Keywords: culture, institutions, development, growth
    JEL: O1 O3 O4 O5
    Date: 2010–09
  6. By: Maik T. Schneider (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Ralph Winkler (Department of Economics and Oeschger Centre for Climate Change Research, University of Bern)
    Abstract: We develop a perpetual youth model to investigate how longevity affects economic growth and welfare. Life expectancy is determined by individuals’ investments in healthcare. We find that improvements in the healthcare technology always increase the steady state growth rate. Although the effect is small, even for large increases in longevity, welfare gains may be substantial depending on the type of the technological improvement. We identify two externalities associated with healthcare investments and provide a condition when healthcare expenditures are inefficiently low in the market equilibrium. Finally, we discuss our results with respect to alternative spillover specifications in the production sector.
    Keywords: economic growth, endogenous longevity, healthcare expenditures, healthcare technology, quality-quantity trade-off
    JEL: O40 I10 J10
    Date: 2010–09
  7. By: Maudos Villarroya Joaquín (University of Valencia; Ivie); Fernández de Guevara Radoselovics Juan (University of Valencia; Ivie)
    Abstract: The aim of the paper is to analyze the process of financial integration in Europe and its impact on economic growth since the introduction of the Euro in 1999. In particular, we focus on how the international financial crisis that started in 2007 has affected integration and growth. By combining information at country, sector and firm level, we quantify the effect of financial integration on financial development and therefore on economic growth. Our results illustrate that a significant part (65%) of financial development is attributable to progress in integration, accounting for 1% of the euro area's GDP growth over the period 1999-2008. The financial retrenchment due to the crisis in 2008 has limited GDP growth by 0.75 pp which accounts for a very significant part (58%) of the observed contraction of GDP. However, the global nature of the crisis implies that financial integration has not been strongly reversed in comparison to financial development. Therefore, the decline in the degree of integration in 2008 explains a small percentage of the drop in total capitalization and, as a result, its impact on growth is also small.
    Keywords: Crisis, financial development, financial integration, economic growth
    Date: 2010–05
  8. By: Panagiotis Tsintzos (Department of Economics, University of Macedonia); Theologos Dergiades (Department of Economics, University of Macedonia)
    Abstract: In a continuous time model, a representative household has to allocate its investment and consumption in an optimal manner under conditions of uncertainty. In the present study it is hypothesized that there are two types of assets: a risk-free and a risky asset. The risk-free asset is assumed to be the physical capital, while at the same time uncertainty is allowed to result from the exogenous random variations in the public debt market, rendering in this way government bonds to act as the risky-asset. In the endogenous growth framework with productive public investment, the expected long-run growth rate, the dynamic path of consumption as well as the optimal allocation of investment between a risky and a riskless asset, are analytically derived. This kind of treatment allows us to create a locus for the long-run growth over the various levels of uncertainty. The outcome of the analysis is that a rise in uncertainty impacts negatively upon the long-run growth rate. In order to empirically assess the relationship between growth and uncertainty, we lay our emphasis on the US economy for the period 1957:1 to 2008:4. Within the framework of a bivariate BEKK-GARCH(1,1)-M model a significant negative relationship between uncertainty and economic growth has been established.
    Keywords: public debt management; stochastic optimal control; endogenous growth; BEKK GARCH-M model.
    JEL: C32 C51 H50 H63 O40
    Date: 2010–10
  9. By: Thomas Gries (University of Paderborn); Margarete Redlin (University of Paderborn)
    Abstract: Growth, inequality, and poverty are central elements of the development process. However the mutual effects and directions of causality have been, and remain, one of the most controversial issues. After introducing a simple theoretical framework we derive some fundamental relations between growth, inequality and poverty. In the empirical part we test for unit roots and coin- tegration and apply GMM techniques on an error correction model (ECM) to estimate the pairwise short-run and long-run dynamics for income growth and changes in inequality and poverty in a panel of 114 developing countries and six regional subpanels for 1981 to 2005. The results confirm the relations of the theoretical framework; the evidence shows that in nearly all cases the vari- ables exhibit a short-run and long-run relationship. The findings reveal positive bidirectional causality between growth and inequality as well as between in- equality and poverty, and negative bidirectional causality between growth and poverty. Furthermore, the evidence shows that the level of development affects the poverty-reducing effect of growth, and that growth has benefited the poor regions far less. In summary, we show that growth, income distribution and poverty reduction are strongly inter-related, so a sucessful development strat- egy requires effective, country-specific combinations of growth and distribution policies.
    Keywords: poverty, inequality, growth and development, panel cointegration, panel causality
    JEL: I32 O10 O15
    Date: 2010–09
  10. By: Francisco Ferreira (The World Bank)
    Abstract: The joint determination of aggregate economic growth and distributional change has been studied empirically from at least three different perspectives. A macroeconomic approach that relies on cross-country data on poverty, inequality, and growth rates has generated some interesting stylized facts about the correlations between these variables, but has not shed much light on the underlying determinants. “Meso-” and microeconomic approaches have fared somewhat better. The microeconomic approach, in particular, builds on the observation that growth, changes in poverty, and changes in inequality are simply different aggregations of information on the incidence of economic growth along the income distribution. This paper reviews the evolution of attempts to understand the nature of growth incidence curves, from the statistical decompositions associated with generalizations of the Oaxaca-Blinder method, to more recent efforts to generate “economically consistent” counterfactuals, drawing on structural, reduced-form, and computable general equilibrium models.
    Keywords: Poverty and inequality dynamics; growth incidence curves.
    JEL: D31 I32
    Date: 2010
  11. By: Partha Sen
    Abstract: In this paper debt policy in a two-period, two-sector overlapping generations model with Leontief technologies has been analysed. It has been found that debt, issued to transfer resources to the initially old, could be welfare improving in the new steady state for an economy which satisfies the usual conditions for dynamic efficiency viz. the rate of interest is at least as great as the population growth rate. [Working paper No. 137]
    Keywords: Government Debt, Overlapping Generations, Two-Sector Models, Dynamic Efficiency
    Date: 2010
  12. By: Jonathan M. Harris
    Abstract: Serious discussion has begun of policies to promote the goal of increasing well-being without material growth. Moving towards this goal requires a profound reorientation of macroeconomic theory. Importantly, the call by ecological economists to move away from traditional growth-oriented models comes at a moment when standard macroeconomics is in considerable turmoil. The financial crisis of 2008/2009 seriously undermined the basis for mainstream macroeconomics and brought renewed attention to various forms of Keynesian analysis and policy previously regarded as outdated. There is a close complementarity between new Keynesian and ecological perspectives. While older Keynesian analysis was oriented towards promoting growth, a true Keynesian analysis of the relationship between investment and consumption does not depend on a growth orientation. What this analysis has in common with an ecological perspective is the rejection of market optimality assumed in classical models. Moving away from the neoclassical goal of inter-temporal utility maximization allows for different, pluralistic economic goals: full employment, provision of basic needs, social and infrastructure investment, and income equity. These goals are compatible with environmental preservation and resource sustainability, whereas indefinite growth is not. But they require a revitalization of the sphere of social investment, seriously neglected (indeed often omitted completely) in standard models. Reintroducing this perspective allows the development of an economic theory suitable for the transition to a stable-population, low-carbon, resource-conserving global economy. The barriers to this transition are primarily political and institutional, not economic. Specifically, an eco-Keynesian perspective emphasizes new macroeconomic categories including: * human-capital-intensive services * investment in energy-conserving capital * investment in natural and human capital The expansion of these categories provides a basis for growth in wellbeing without growth in throughput, while preserving full employment and economic stability. This paper explores some of the implications of this altered macroeconomic perspective for development in both the global "North" and "South". It is suggested that the problems following the global financial crisis cannot be resolved by a return to traditional growth patterns, and will require large-scale practical policies based on eco-Keynesianism.
  13. By: Halter, David; Oechslin, Manuel
    Abstract: The empirical literature on the relationship between inequality and growth offers a contradictory assessment: Estimators based on time-series (differences-based) variation indicate a strong positive link while estimators (also) exploiting the cross-sectional (levelbased) variation suggest a negative relationship. Using an expanded dataset, the present paper confirms this conflicting pattern — and reconciles it on the basis of a simple model. We argue that the differences-based methods are prone to reflect the mostly positive shortor medium-run implications of inequality while the level-based estimators also incorporate more negative long-term consequences. Thus, the latter estimates come close to reflecting the adverse overall impact of inequality in the long run.
    Keywords: Growth; Inequality; Long-run Effects; Medium-run Effects
    JEL: C23 O11 O15 O43
    Date: 2010–09
  14. By: V. Pandit
    Abstract: Use of Macroeconometric models has by now assumed a measure of universality as an unavoidable aid to forecasting and policy analysis; challenges and controversies spread over more than two decades notwithstanding. While such models are typically designed and utilised for dealing with short term problems their application to issues of long term growth has been equally important, though less frequent. The present exercise is intended to examine India’s growth prospects during the first two decades of the third millennium on the basis of a comprehensive econometric model. [Working Paper No. 100]
    Keywords: Macroeconometric, models, policy analysis, long term growth,
    Date: 2010

This nep-fdg issue is ©2010 by Iulia Igescu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.