nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒11‒13
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Total public debt and economic growth;in developing countries By Andrea Filippo Presbitero
  2. How to offset the negative trend growth rate in the Italian economy? By Rao, B. Bhaskara; Antonio, Paradiso
  3. Political Competition, Policy and Growth: Theory and Evidence from the United States By Timothy Besley; Torsten Persson; Daniel M. Sturm
  4. Determinants of the long-run growth rate in the South-Asian countries By Rao, B. Bhaskara; Cooray, Arusha
  5. The Trade–Growth Relationship in Israel Revisited: Evidence from Annual Data, 1960-2004 By Abo-Zaid, Salem
  6. Knowledge and Growth in the Very Long-Run By Strulik, Holger
  7. The Effects of Foreign Direct Investment on the Host Country Economic Growth - Theory and Empirical Evidence By Rui Moura; Rosa Forte
  8. Local and Global Externalities, Environmental Policies and Growth By Karen Pittel; Dirk Rübbelke
  9. Inequality, Growth and Public Spending in Central, East and Southeast Europe By Mario Holzner
  10. How Much Do Educational Outcomes Matter in OECD Countries? By Eric A. Hanushek; Ludger Woessmann
  11. The History Augmented Solow model By Dalgaard, Carl-Johan; Strulik, Holger
  12. Status in a canonical macro model: labour supply, growth, and inequality By Tsoukis, Christopher; Tournemaine, Frederic
  13. Complete closed-form solution to a stochastic growth model and corresponding speed of economic recovery By Feicht, Robert; Stummer, Wolfgang

  1. By: Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: The global crisis and the expansionary government reaction in many countries has revamped the attention of policy makers and academics on the growth effects of large public debts. Recent empirical studies investigate the impact of public debt on growth in advanced and emerging countries. This paper aims at complementing the existing evidence focusing on developing countries, where the increase in domestic borrowing, already started before the crisis, requires a more comprehensive analysis, based not only on external debt, but on total public debt. Results on a panel of low- and middle-income countries over the period 1990-2007 show that public debt has a negative impact on output growth up to a threshold of 90 percent of GDP, beyond which its effect becomes irrelevant. This non-linear effect can be explained by country-specific factors since debt overhang is a growth constraint only in countries with sound macroeconomic policies and stable institutions.
    Keywords: domestic debt, growth, public debt
    JEL: F33 F34 F35 O11
    Date: 2010–10
  2. By: Rao, B. Bhaskara; Antonio, Paradiso
    Abstract: The trend growth rate of the Italian economy has been declining since the 1980s. To examine how to offset this trend, we estimate a simple specification of an endogenous growth model. Cointegrating equations for the long-run output growth and its determinants are estimated with alternative time series methods. Our results imply that policies to double trade openness are necessary.
    Keywords: Economic Growth; Trade Openness; Italy
    JEL: O40 O52
    Date: 2010–11–03
  3. By: Timothy Besley; Torsten Persson; Daniel M. Sturm
    Abstract: This paper develops a simple model to analyze how a lack of political competition may leadto policies that hinder economic growth. We test the predictions of the model on panel datafor the US states. In these data, we find robust evidence that lack of political competition in astate is associated with anti-growth policies: higher taxes, lower capital spending and areduced likelihood of using right-to-work laws. We also document a strong link between lowpolitical competition and low income growth.
    Keywords: political competition, competition, government, US, economic development
    JEL: D72 H11 H70 N12 O11
    Date: 2010–10
  4. By: Rao, B. Bhaskara; Cooray, Arusha
    Abstract: This study uses the extreme bounds analysis of Leamer (1983) to identify some robust determinants of the long-run growth rate in seven South-Asian countries. The relationships between the two are estimated using panel data. We also consider some methodological issues concerning the specification. It is argued that the frequently used specification of the growth equation by the cross-country studies is inappropriate for estimating the long-run or steady state growth effects of variables such as the investment ratio. We use an alternative specification. Since the steady state growth rate in theoretical growth models depends on total factor productivity (TFP), we estimate the long-run growth effects of variables by analysing the determinants of TFP. This approach is suggested by a few influential economists and has been used by Senhadji (2000).
    Keywords: South-Asian countries; Extreme bounds analysis; Long-run growth rate; Total factor productivity.
    JEL: O11
    Date: 2010–11
  5. By: Abo-Zaid, Salem
    Abstract: The topic of trade effects on economic growth has been usually controversial. Former empirical evidence linking trade to growth in Israel has been mixed and inconclusive either. This study reexamines the role of trade in Israel by testing for cointegration and causality from both exports and imports to output and total factor productivity over the period 1960-2004. The results suggest that both output and TFP are positively long-run correlated with exports and imports. The Granger causality tests indicate positive effects of exports on both output and TFP, where imports influence output only. In addition, physical capital has also been found to be Granger-caused by imports. This may suggest that the impact of imports on output is through the accumulation of physical capital and/or improvement in TFP over time.
    Keywords: Trade-growth relationships; Cointegration; Causality ; Israeli economy
    JEL: O47 C22 F43
    Date: 2010–10–31
  6. By: Strulik, Holger
    Abstract: This paper proposes a theory for the gradual evolution of knowledge diffusion and growth over the very long run. A feedback mechanism between capital accumulation and the ease of knowledge diffusion explains a long epoch of (quasi-) stasis and an epoch of high growth linked by a gradual economic take-off. It is shown how the feedback mechanism can explain the Great Divergence, the failure of less developed countries to attract capital from abroad, and a productivity slowdown in fully developed countries. An extension towards a two-region world economy shows robustness of the gradual take-off and other interesting interaction between forerunners and followers of the Industrial Revolution.
    Keywords: Industrial Revolution; Endogenous Growth; Knowledge Diffusion; Productivity Slowdown; Convergence; Divergence
    JEL: O10 O30 O40 E22
    Date: 2010–10
  7. By: Rui Moura (Faculdade de Economia, Universidade do Porto); Rosa Forte (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: Foreign direct investment (FDI) influences the host country’s economic growth through the transfer of new technologies and know-how, formation of human resources, integration in global markets, increase of competition, and firms’ development and reorganization. Empirically, a variety of studies considers that FDI generate economic growth in the host country. However, there is also evidence that FDI is a source of negative effects. Given this ambiguity of results, the present paper makes a review of the existing theoretical and empirical literature on the subject, intending to shed light on the main explanations for the divergence of results in different studies. The main idea that stands out in this review is that the effects of FDI on economic growth are dependent on the existing or subsequently developed internal conditions of the host country (economic, political, social, cultural or other). Thus, the host countries authorities have a key role in creating the conditions that allow for the leverage of the positive effects or for the reduction of the negative effects of FDI on the host country’s economic growth.
    Keywords: Foreign Direct Investment; Economic Growth; Literature Survey
    JEL: F21 O40
    Date: 2010–11
  8. By: Karen Pittel; Dirk Rübbelke
    Abstract: The paper analyzes the implications of local and global pollution when two types of abatement activities can be undertaken. One type reduces solely local pollution (e.g., use of particulate matter filters) while the other mitigates global pollution as well (e.g., application of fuel saving technologies). In the framework of a 2-country endogenous growth model, the implications of different assumptions about the degree to which global externalities are internalized are analyzed. Subsequently, we derive policy rules adapted to the different scenarios. Special attention is paid to pollution, growth and optimal policy in the case of asymmetric internalization.<br />
    Keywords: economic growth, global and local externalities, government policies
    Date: 2010–10
  9. By: Mario Holzner (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The paper analyses the joint determinants of inequality and growth with a special emphasis on public spending structures in transition. The mutual benefit of low real interest rates, to both equity and economic development is a major result of this paper. In terms of public spending items we find a positive correlation with equity and a negative one with growth as several of the government expenditure items seem to act counter-cyclically. In the late 1990s and early 2000s the European integration process allowed most of the transition economies to aim for the best of both worlds: equity and economic development.
    Keywords: inequality, government expenditures, economic growth, transition
    JEL: D63 H5 O4 P2
    Date: 2010–10
  10. By: Eric A. Hanushek; Ludger Woessmann
    Abstract: Existing growth research provides little explanation for the very large differences in long-run growth performance across OECD countries. We show that cognitive skills can account for growth differences within the OECD, whereas a range of economic institutions and quantitative measures of tertiary education cannot. Under the growth model estimates and plausible projection parameters, school improvements falling within currently observed performance levels yield very large gains. The present value of OECD aggregate gains through 2090 could be as much as $275 trillion, or 13.8 percent of the discounted value of future GDP. Extensive sensitivity analyses indicate that, while differences between model frameworks and alternative parameter choices make a difference, the economic impact of improved educational outcomes remains enormous. Interestingly, the quantitative difference between an endogenous and neoclassical model framework – with improved skills affecting the long-run growth rate versus just the steady-state income level – matters less than academic discussions suggest. We close by discussing evidence on which education policy reforms may be able to bring about the simulated improvements in educational outcomes.
    JEL: H0 I2 J24 J48 O4
    Date: 2010–11
  11. By: Dalgaard, Carl-Johan; Strulik, Holger
    Abstract: Unified growth theory predicts that the timing of the fertility transition is a key determinant of contemporary comparative development, as it marks the onset of the take-off to sustained growth. Neoclassical growth theory presupposes a take-off, and explains comparative development by variations in (subsequent) investment rates. The present analysis integrates these two perspectives empirically, and shows that they together constitute a powerful predictive tool vis-a-vis contemporary income differences.
    Keywords: Comparative Development; Unified Growth Theory; Neoclassical Growth Theory
    JEL: O11 O57
    Date: 2010–11
  12. By: Tsoukis, Christopher; Tournemaine, Frederic
    Abstract: We introduce status in the most standard (canonical) macro model that is able to provide an analysis of growth and distribution. We consider the question of whether status considerations enable the model to meet some important empirical findings (which we review) related to rising labour supply (the work-life balance), rising income inequality, and changing factor shares. We find a promising role for status in the explanation of these empirical regularities.
    Keywords: Status; growth; inequality; labour supply; social/behavioural macroeconomics
    JEL: O41 E25 E21
    Date: 2010–07
  13. By: Feicht, Robert; Stummer, Wolfgang
    Abstract: We consider a continuous-time neoclassical one-sector stochastic growth model of Ramsey-type with CRRA utility and Cobb-Douglas technology, where each of the following components are exposed to exogeneous uncertainties (shocks): capital stock K, effectiveness of labor A, and labor force L; the corresponding dynamics is modelled by a system of three interrelated stochastic differential equations. For this framework, we solve completely explicitly the problem of a social planner who seeks to maximize expected lifetime utility of consumption. In particular, for any (e.g. short-term) time-horizon t > 0 we obtain in closed form the sample paths of the economy values Kt,At, Lt and the optimal consumption copt(Kt,At, Lt) as well as the non-equilibrium sample paths of the per capita effective capital stock kt = Kt / At Lt . Moreover, we also deduce explicitly the limiting long-term behaviour of kt expressed by the corresponding steady-state equilibrium distribution. As illustration, we present some Monte Carlo simulations where the abovementioned economy is considerably disturbed (out of equilibrium) by a sudden crash but recovers well within a realistic-size time-period. --
    Keywords: stochastic Ramsey-type growth,utility maximization,stochastic differential equations,explicit closed-form sample path dynamics,economic recovery,Monte Carlo simulations,steady-state
    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.