nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒11‒20
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. How to offset the negative trend growth rate in the Italian economy? By Rao, B. Bhaskara; Antonio, Paradiso
  2. Fiscal Policy in a Growth Framework By Norman Gemmell
  3. Is Fiscal Decentralization Harmful for Economic Growth? Evidence from the OECD Countries By Roberto Ezcurra; Andrés Rodríguez-Pose
  4. External Debt and Growth in Developing Countries: A Sensitivity and Causal Analysis By Abdur R. Chowdhury
  5. Growth, Poverty and Inequality: From Washington Consensus to Inclusive Growth By Alfredo Saad-Filho
  6. Public Ownership of Banks and Economic Growth – The Role of Heterogeneity By Tobias Körner; Isabel Schnabel
  7. The impact of creativity on growth in German regions By Wedemeier, Jan
  8. Deregulation, economic growth and growth acceleration By Stankov, Petar
  9. International Capital Flows and Credit Market Imperfections: a Tale of Two Frictions By Alberto Martin; Filippo Taddei
  10. On the Latin American Growth Paradox: A Hindsight into the Golden Age By Giorgia Barboni; Tania Treibich
  11. "Financial Stability, Regulatory Buffers, and Economic Growth: Some Postrecession Regulatory Implications" By Éric Tymoigne
  12. Living Standard and Economic Growth: A Fresh Look at the Relationship Through The Nonparametric Approach By Indrani Chakraborty
  13. The Great Recession: US dynamics and spillovers to the world economy By Fabio C. Bagliano; Claudio Morana

  1. 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
  2. By: Norman Gemmell
    Abstract: This paper assesses recent theorising and empirical evidence on the impact of fiscal policy—taxes, public expenditures and budget deficits—on long-run growth. It considers the relevance of recent advances in growth theory for low-income countries and compares the evidence for low-income countries with that for middle-and high-income (OECD) countries. [Discussion Paper No. 2001/84]
    Keywords: fiscal policy, public expenditure, taxation, economic growth
    Date: 2010
  3. By: Roberto Ezcurra; Andrés Rodríguez-Pose
    Abstract: The global drive towards decentralization has been increasingly justified on the basis thatgreater transfers of resources to subnational governments are expected to deliver greaterefficiency in the provision of public goods and services and greater economic growth. Thispaper examines whether this is the case, by analysing the relationship betweendecentralization and economic growth in 21 OECD countries during the period between 1990and 2005 and controlling not only for fiscal decentralization, but also for political andadministrative decentralization. The results point towards a negative and significantassociation between fiscal decentralization and economic growth in the sample countries, arelationship which is robust to the inclusion of a series of control variables and to differencesin expenditure preferences by subnational governments. The impact of political andadministrative decentralization on economic growth is weaker and sensitive to the definitionand measurement of political decentralization.
    Keywords: Fiscal decentralization, political decentralization, administrative decentralization, economic growth, OECD
    JEL: H40 H52
    Date: 2010–05
  4. By: Abdur R. Chowdhury
    Abstract: The paper aims to enhance the existing literature on the debt-growth nexus by analysing the relationship in two separate country groups using the extreme bounds analysis for sensitivity tests and the mixed, fixed, and random coefficient approach that allows for heterogeneity in the causal relationship between debt and growth. Irrespective of the debt measure used, the results are robust across the two country groups—HIPC and non-HIPC—as well as two different testing procedures. The extreme bounds analysis shows that the relationship between a debt measure and economic growth is robust to changes in the conditioning set of information included in the regression equations. The mixed, fixed, and random coefficient approach, on the other hand, show a statistically significant negative causal impact running from each of the four debt measures to economic growth in both country groups. The results have important policy implications. [Discussion Paper No.2001/95]
    Keywords: externaldebt,growth,sensitivityanalysis,causality
    Date: 2010
  5. By: Alfredo Saad-Filho
    Abstract: This paper reviews recent economic policy debates about the relationship between growth, poverty and inequality. These debates have tended to focus on whether market-led growth is sufficient to eliminate poverty and reduce inequality, or whether specific policies are necessary because untargeted growth may be insufficient or even perverse. The paper charts the degenerating outcomes of these debates, and the emergence of the inclusive growth (IG) paradigm within the World Bank. A critical examination of IG suggests that its weaknesses are best addressed through a more ambitious restatement of the pro-poor goals of economic policy.
    Keywords: Macroeconomic policy, pro-poor policies, inclusive growth, World Bank, Washington Consensus
    JEL: E60 E64 O23
    Date: 2010–11
  6. By: Tobias Körner (Ruhr Graduate School in Economics); Isabel Schnabel (University of Mainz, CEPR, and MPI Bonn)
    Abstract: In an influential paper, La Porta, Lopez-De-Silanes and Shleifer (2002) argued that public ownership of banks is associated with lower GDP growth. We show that this relationship does not hold for all countries, but depends on a country’s financial development and political institutions. Public ownership is harmful only if a country has low financial development and low institutional quality. The negative impact of public ownership on growth fades quickly as the financial and political system develops. In highly developed countries, we find no or even positive effects. Policy conclusions for individual countries are likely to be misleading if such heterogeneity is ignored.
    Keywords: Public banks, economic growth, financial development, quality of governance, political institutions
    JEL: G18 G21 O16
    Date: 2010–09
  7. By: Wedemeier, Jan
    Abstract: The objective of this paper is to analyze the impact of the creative professions - technological employees and bohemians - on economic growth in Germany’s planning regions. It is concluded that technological employees and bohemians foster economic growth. We find that growth is particularly dynamic in agglomerated and urbanized regions. Among regional factors relevant to the location decisions of creative professionals, diversity is analyzed in particular, as it might stimulate growth because of its potential to increase the rate of interchange of different ideas and knowledge. Diversity is therefore a “knowledge production factor." The analysis of both - creative professions and diversity - is related to two current topics in regional economics, namely the knowledge based economy and its effects on city development, and the topic of creative cities.
    Keywords: Regional Economic Growth; Creativity; Diversity
    JEL: R1 O3 O4 R23
    Date: 2010
  8. By: Stankov, Petar
    Abstract: The paper analyzes the influence of credit-, labor-, and product market deregulation policies on economic growth in more than 70 economies over a period of 30 years. It addresses both the issues of reform measurement and its endogeneity. Specifically, by combining a difference-in-difference strategy with an IV approach to the endogeneity of the reform timing, this work finds that deregulation contributed to the per capita GDP levels of the early reformers relatively more than to the ones of the late reformers. However, the paper also finds that accelerating credit market reforms leads to a large growth acceleration effect for the late reformers, which points to large dynamic welfare gains from deregulation. The latter result suggests that a large-scale credit market re-regulation in the aftermath of the Great Recession is a misguided approach to deal with the consequences of the financial crisis.
    Keywords: Deregulation; economic growth; growth acceleration; origins of institutional change
    JEL: O11 L51 D72 G28
    Date: 2010–10
  9. By: Alberto Martin; Filippo Taddei
    Abstract: The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial frictions, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy's equilibrium interest rate, and (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also explore how these results change when limited pledgeability is added to the model. We conclude that both frictions complement one another and argue that limited pledgeability exacerbates the effects of adverse selection.
    Keywords: Limited Pledgeability; Asymmetric Information; International Capital Flows; Credit Market Imperfections
    JEL: D53 D82 E22 F34
    Date: 2010
  10. By: Giorgia Barboni; Tania Treibich
    Abstract: In 1950, Latin American countries capabilities were promising, and the subcontinent was thought to have a big potential for convergence. In order to understand why this prediction was not fullled, we apply in this paper the framework set by Fagerberg and Srholec (2008). Our study of the economic evolution of Latin America during the Golden Age (1950-1975) is based on historical data on economic, political and social variables from 18 countries. We use a factor analysis to classify our 20 indicators into ve dimensions: the level of "industrialization", "human capital", the "macroeconomic fundamentals", "politics" and "religion". We nd that only the quality of human capital and the presence of Roman Catholics signicantly and positively aected Latin American economic growth in this period, while the determinants traditionally put forward in the empirical growth literature, such as technical change and openness, did not. Finally, the positive correlation between the religion and education variables reveals that this result is partly related to the role of the Catholic Church as an educational institution.
    Keywords: Growth; Development; Convergence; Factor Analysis; Latin America;Economic History; Golden Age.
    JEL: N26 O54
    Date: 2010–11–12
  11. By: Éric Tymoigne
    Abstract: Over the past 40 years, regulatory reforms have been undertaken on the assumption that markets are efficient and self-corrective, crises are random events that are unpreventable, the purpose of an economic system is to grow, and economic growth necessarily improves well-being. This narrow framework of discussion has important implications for what is expected from financial regulation, and for its implementation. Indeed, the goal becomes developing a regulatory structure that minimizes the impact on economic growth while also providing high-enough buffers against shocks. In addition, given the overarching importance of economic growth, economic variables like profits, net worth, and low default rates have been core indicators of the financial health of banking institutions. This paper argues that the framework within which financial reforms have been discussed is not appropriate to promoting financial stability. Improving capital and liquidity buffers will not advance economic stability, and measures of profitability and delinquency are of limited use to detect problems early. The paper lays out an alternative regulatory framework and proposes a fundamental shift in the way financial regulation is performed, similar to what occurred after the Great Depression. It is argued that crises are not random, and that their magnitude can be greatly limited by specific pro-active policies. These policies would focus on understanding what Ponzi finance is, making a difference between collateral-based and income-based Ponzi finance, detecting Ponzi finance, managing financial innovations, decreasing competitions in the banking industry, ending too-big-to-fail, and deemphasizing economic growth as the overarching goal of an economic system. This fundamental change in regulatory and supervisory practices would lead to very different ways in which to check the health of our financial institutions while promoting a more sustainable economic system from both a financial and a socio-ecological point of view.
    Keywords: Financial Crisis; Financial Regulation; Banking Supervision; Sustainability
    JEL: E12 E58 G18 G28 Q01
    Date: 2010–11
  12. By: Indrani Chakraborty
    Abstract: The relative role of economic growth vis-a-vis public action in raising living standards in developing countries has been a point of contention for quite some time now. The arguments on both sides are usually based on some estimated relationship between indicators of living standard and other variables. A critical review of the existing studies throws up some methodological issues among which misspecification of the model is most crucial. An alternative approach, viz. the nonparametric regression method, has been shown to be superior in taking care of this problem. Analysing the data for 88 developing countries we note that per capita income has positive significant effect on the life-expectancy at birth. However, we have not observed any relationship between the improvement in life-expectancy and change in income as well as the level of income, unlike some earlier studies. This study has the implication that well-targeted public policies may be successful in improving the standard of living in poor economies in the short-term. But for sustainability in the long-term, growth-based strategies are necessary. [Working Paper No. 283]
    Keywords: standard of living, model specification, nonparametric regression, public action vs. public expenditure
    Date: 2010
  13. 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: The paper aims at assessing the mechanics of the Great Recession, considering both its domestic propagation within the US, as well as its spillovers to advanced and emerging economies. A total of 50 countries has been investigated by means of a large-scale open economy macroeconometric model, providing an accurate assessment of the international macro/finance interface over the whole 1980-2009 period. It is found that a boom-bust credit cycle interpretation of the crisis is consistent with the empirical evidence. Moreover, concerning the real effects of the crisis within the US, stronger evidence of an asset prices channel, rather than a liquidity channel, has been detected. The results also support the effectiveness of the expansionary fiscal/monetary policy mix implemented by the Fed and the US government. Concerning the spillovers to the world economy, it is found that while the financial shock has spilled over to foreign countries through US housing and stock price dynamics, as well as excess liquidity creation, the trade channel likely is the key trasmission mechanism of the real shock.
    Keywords: Great Recession, financial crisis, economic crisis, boombust, credit cycle, international business cycle, factor vector autoregressive models
    JEL: C22 E32 F36
    Date: 2010–11

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