nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒11‒27
ten papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Testing the finance-growth link: is there a difference between developed and developing countries? By Gilles Dufrénot; Valérie Mignon; Anne Peguin-Feissolle
  2. Is History a Blessing or a Curse? International Borrowing without Commitment, Leapfrogging and Growth Reversals By Raouf Boucekkine; Patrick-Antoine Pintus
  3. Economic growth, electricity consumption and foreign dependence in Italy between 1963 and 2007 By Vecchione, Gaetano
  4. International capital flows and credit market imperfections: a tale of two frictions By Alberto Martin; Filippo Taddei
  5. The determinants of macroeconomic volatility: A Bayesian model averaging approach By Spiliopoulos, Leonidas
  6. Did Globalization Drive Convergence? Identifying Cross-Country Growth Regimes in the Long Run By Gianfranco Di Vaio; Kerstin Enflo
  7. Industrialization and the role of government By Takeuchi, Nobuyuki
  8. Trust, Confidence and Economic Growth An Evaluation of the Beugelsdijk Hypothesis By Benjamin Volland
  9. Post-reform economic development in Punjab: constraints and remedies By Singh, Lakhwinder
  10. Numerical Explorations of the Ngai-Pissarides Model of Growth and Structural Change By Dietrich, Andreas; Krüger, Jens

  1. By: Gilles Dufrénot (DEFI - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II); Valérie Mignon (CEPII - Centre d'études prospectives et d'informations internationales - Université de Paris X - Nanterre); Anne Peguin-Feissolle (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: We revisit the evidence of the existence of a long -run link between financial intermediation and economic growth, by testing of cointegration between the growth rate of real GDP, control variables and three series reflecting financial intermediation. We consider a model with a factor structure that allows us to determine whether the finance-growth link is due to cross countries dependence and/or whether it characterizes countries with strong heterogeneities. We employ techniques recently proposed in the panel data literature, such as PANIC analysis and cointegration in common factor models. Our results show differences between the developed and developing countries. We run a comparative regression analysis on the 1980-2006 period and find that financial intermediation is a positive determinant of growth in developed countries, while it acts negatively on the economic growth of developing countries.
    Keywords: growth; developing countries; financial intermediation
    Date: 2010–11–15
  2. By: Raouf Boucekkine (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Patrick-Antoine Pintus (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: We develop a simple open-economy AK model with collateral constraints that accounts for growth-reversal episodes, during which countries face abrupt changes in their growth rate that lead to either growth miracles or growth disasters. Absent commitment to investment by the borrowing country, imperfect contract enforcement leads to an informational lag such that the debt contracted upon today depends upon the past stock of capital. The no-commitment delay originates a history effect by which the richer a country has been in the past, the more it can borrow today. For (arbitrarily) small deviations from perfect contract enforcement, the history effect offsets the growth benefits from international borrowing and dampens growth, and it leads to leapfrogging in long-run levels. When large enough, the history effect originates growth reversals and we connect the latter to leapfrogging. Finally, we argue that the model accords with the reported evidence on growth disasters and growth accelerations. We also provide examples showing that leapfrogging and growth reversals may coexist, so that currently poor but fast-growing countries experiencing sharp growth reversals may end up, in the long-run, significantly richer than currently rich but declining countries.
    Keywords: Growth Reversals; Leapfrogging; International Borrowing; Open Economies
    Date: 2010
  3. By: Vecchione, Gaetano
    Abstract: The energy sector is assuming an increasing importance in the global economy. As a consequence, there is a vast literature on the causal relation between energy use and others economic variables. In this paper, I investigate the relationship between electricity consumption and economic growth for Italy using yearly data covering the period 1963–2007. Unlike previous works, this paper specifically concerns the causal link between the dynamics of GDP and the different sources of electricity production. Regarding the dependence from foreign suppliers, the paper tests the hypothesis of a causal relationship between economic growth and electricity imports. The results show a unidirectional causality from economic activity to other variables. More specifically, economic growth Granger cause total electricity consumption, industrial consumption and electricity import. For the others source of generation, any specific causal relationship has been found.
    Keywords: : Energy and Growth; Italy; Vector Error Correction Model; Granger Causality
    JEL: C32 Q48 Q40
    Date: 2010–11–22
  4. 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 Liability, Asymmetric Information, International Capital Flows.
    JEL: D53 D82 E22 F34
    Date: 2010–11
  5. By: Spiliopoulos, Leonidas
    Abstract: Bayesian model averaging is applied to robustly ascertain the determinants of various output volatility measures, including the downside semideviation of growth rates. Financial sophis- tication variables are found to have qualitatively different effects on volatility. The ratio of govern- ment expenditure to GDP exhibited a significant positive relationship with volatility and the trade share of GDP was positively related for a balanced dataset of developed and developing countries between 1960-89, and negatively related for developing countries between 1974-89. Other significant determinants were the black market premium, civil liberties, political rights, rule of law, and ratios of short-term debt and taxation to GDP.
    Keywords: Macroeconomic volatility; Growth; Government policy; Bayesian model averaging; Model selection
    JEL: F00 E32 O47 C11 E60
    Date: 2010–11–18
  6. By: Gianfranco Di Vaio (Research and Studies Area. Cassa Depositi e Prestiti, Rome, Italy; Center for Labor and Economic Growth, LUISS Guido Carli, Rome, Italy; Rimini Centre for Economic Analysis, Rimini, Italy); Kerstin Enflo (Department of Economic History, Lund University, Lund, Sweden)
    Abstract: This paper is the fi?rst to apply a fi?nite mixture model to a sample of 64 nations to endogenously analyze the cross-country growth behavior over the period 1870-2003. Results show that growth patterns were segmented in two worldwide regimes, the one characterized by convergence in per capita income, and the other by divergence. Interestingly, when three historical epochs are distinctly analyzed, in order to investigate the empirical link between globalization and convergence, the dynamics which dominated over the whole period seem to have emerged only during the post-1950 years. In contrast, the First Global Wave was marked by persistent heterogeneities.
    Keywords: Globalization; Economic growth; Income convergence; Multiple regimes; Mixture models
    JEL: C52 N10 O47
    Date: 2010–01
  7. By: Takeuchi, Nobuyuki
    Abstract: We construct a two-sector endogenous growth model to examine the role of government in industrialization. Three main features of this model are (a) household preference is non-homothetic; (b) government’s sector-specific spending is introduced as a production factor and (c) technological progress occurs only in the manufacturing sector through learning-by-doing. By using the model with these features, we derive the optimal policy for government resource allocation, optimal tax rate and share of government spending for each sector, to maximize the household’s utility. In addition, we examine the dynamics of the model. The model reveals that (a) increments in both agricultural productivity and manufacturing productivity cause labour to move from the agricultural sector to the manufacturing sector; (b) depending on the relative elasticity of production with respect to government’s spending between the two sectors, the optimal tax rate will shrink or expand with the passage of time and will stay at a level of balanced growth path in the long run and (c) as the industrialization progresses, the optimal share of government spending for the agricultural sector will decline.
    Keywords: industrialization; productive government spending; learning-by-doing; economic growth
    JEL: O11 O41
    Date: 2010–11
  8. By: Benjamin Volland (Max Planck Institute of Economics, Jena, Germany)
    Abstract: This paper analyses the hypothesis that the robust relationship between trust - as measured by the World Values Survey's question "In general, do you think that most people can be trusted, or that you can't be too careful in dealing with people?" - and economic growth, established by empirical macroeconomic growth literature (Knack & Keefer, 1997; Zak & Knack, 2001; Beugelsdijk, de Groot, & van Schaik, 2004; Dearmon & Grier, 2009) in fact captures the well-functioning of institutions. Our results reveal that the correlation between trust and economic growth is robust in terms of statistical significance and sign of the estimated coefficient, when controling for the respondents' perceived well-functioning of institutions. While underlining the existing empirical evidence that trust matters in explaining differences in economic performance, our results also show that this influence is largely independent of institutional well-functioning.
    Keywords: Trust, Institutions, Economic growth
    JEL: B40 O11 Z13
    Date: 2010–11–15
  9. By: Singh, Lakhwinder
    Abstract: Punjab economy has experienced a down turn in its economic development in the post-reform period compared with acceleration of economic growth of the Indian economy as well as other dynamic states. Therefore, a legitimate question arises why Punjab economy could not develop at a rate that has experienced by the Indian economy. An attempt has been made in this paper to explore economic development experience of Punjab economy in a comparative perspective to arrive at the factors that have contributed to the down turn in economic growth during the post-reform period. Alternative path of structural transformation has been worked out to rejuvenate and rebuild the economy of Punjab in the long run. Policy suggestions that can reverse the down turn in economic growth in short to medium term have also been identified.
    Keywords: Punjab economy; economic development; deceleration of economic growth; Structural transformation; alternative path of development
    JEL: O10 O16 P52
    Date: 2010–11–16
  10. By: Dietrich, Andreas; Krüger, Jens
    Abstract: In this paper we specialize the Ngai-Pissarides model of growth and structural change [American Economic Review 97 (2007), 429-443] to the case of three sectors, representing the primary (agriculture, mining), secondary (construction, manufacturing) and tertiary (services) sectors. On that basis we explore the dynamic properties of the model along the transition path to the steady-state equilibrium by numerical methods. Our explorations show that the model misses several stylized facts of structural change among these sectors. We propose several extensions of the model to align the model more closely with the facts.
    Keywords: economic growth, structural change, transition path
    Date: 2010–10

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