nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒12‒04
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. The relationship between inflation, output growth, and their uncertainties: Evidence from selected CEE countries By Hasanov, Mübariz; Omay, Tolga
  2. How does foreign direct investment really affect developing countries` growth? By Dierk Herzer
  3. Economic Growth and Financial Depth: Is the Relationship Extinct Already? By Peter L. Rousseau; Paul Wachtel
  4. Capital mobility, balance of payments constraints, and economic growth: an empirical dynamic analysis By Sérgio F. Meyrelles-Filho; Frederico G. Jayme Jr
  5. The Impact of the Great Recession on Emerging Markets By Mali Chivakul; Ricardo Llaudes; Ferhan Salman
  6. Crisis and Recovery: Role of the Exchange Rate Regime in Emerging Market Countries By Charalambos G. Tsangarides
  7. Study on Quality of Public Finances in Support of Growth in the Mediterranean Partner Countries of the EU By Leonor Coutinho; Luc De Wulf; Santiago Florez; Cyrus Sassanpour
  8. Unemployment and Productivity in the Long Run: the Role of Macroeconomic Volatility By Pierpaolo Benigno; Paolo Surico; Luca Antonio Ricci
  9. Regional Sources of Growth Acceleration in India By Ravindra H. Dholakia
  10. Poverty Reduction and Economic Structure Comparative Path Analysis for Mozambique and Vietnam By Channing Arndt; Andres Garcia; Finn Tarp; James Thurlow
  11. Spillovers from Europe into Morocco and Tunisia By Reinout De Bock; Daniel Florea; Joël Toujas-Bernate
  12. After the Crisis: Assessing the Damage in Italy By Silvia Sgherri; Hanan Morsy
  13. Do Credit Shocks Matter? A Global Perspective By M. Ayhan Kose; Christopher Otrok; Raju Huidrom; Thomas Helbling
  14. Modeling the link between US inflation and output: the importance of the uncertainty channel By Conrad, Christian; Karanasos, Menelaos

  1. By: Hasanov, Mübariz; Omay, Tolga
    Abstract: In this paper, we examine causal relationships among inflation rate, output growth rate, inflation uncertainty and output uncertainty for ten Central and Eastern European transition countries. For this purpose, we estimate a bivariate GARCH model that includes output growth and inflation rates for each country. Then we use conditional standard deviations of inflation and output to proxy nominal and real uncertainty, respectively, and perform Granger-causality tests. Our results suggest that inflation rate induces uncertainty about both inflation rate and output growth rate, which is detrimental for real economic activity. On the other hand, we find that output growth rate reduces macroeconomic uncertainty in some countries. In addition, we also examine and discuss causal relationships among remaining variables.
    Keywords: Inflation; output growth; uncertainty; Granger-Causality tests; transition countries
    JEL: C51 C32 C52 E30 E10
    Date: 2010–07–09
  2. By: Dierk Herzer (University of Wuppertal / Germany)
    Abstract: This paper contributes to the literature on foreign direct investment (FDI) and economic growth in two main ways. First, we examine the effect of FDI on economic growth for 44 developing countries over the period 1970 to 2005 using heterogeneous panel cointegration techniques that are robust to omitted variables and endogenous regressors. In contrast to previous studies, we find that FDI has, on average, a negative effect on growth in developing countries, but that there are large cross-country differences in the growth effects of FDI. Second, we use a general-tospecific model selection approach to systematically search for country-specific factors explaining the cross-country differences in the growth effects of FDI. Contrary to previous results, we find that the cross-country differences in per capita income, human capital, openness, and financial market development cannot explain the cross-country differences in the growth effects of FDI. Instead, the growth effects of FDI are positively related to freedom from government intervention and freedom from business regulation, and negatively related to FDI volatility and natural resource dependence.
    Keywords: FDI; Growth; Developing countries; Panel cointegration; General-to-specific approach
    JEL: F21 F43 C23 C21
    Date: 2010–11–16
  3. By: Peter L. Rousseau; Paul Wachtel
    Abstract: Although the finance–growth nexus has become firmly entrenched in the empirical literature, studies that question the strength of the empirical results have appeared and seem to have become more frequent as well. A re-examination of the core cross- country panel results that established the relationship between financial depth and growth rates are done. The sensitivity of the core result to changes in time period and variation in the sample of countries included are also examined.
    Keywords: finance–growth nexus, rolling regression, robustness, cross-country growth
    Date: 2010
  4. By: Sérgio F. Meyrelles-Filho (UFGO); Frederico G. Jayme Jr (Cedeplar-UFMG)
    Abstract: This paper analyses empirically the relationship between economic growth and the openness of the financial account of the balance of payments. It takes into consideration the balance of payments’ constrained growth, as well as the difficulties in the empirical literature in measuring capital mobility. Starting from the capital mobility index we estimate a panel across 80 countries, both developed and developing between 1997-2003. Results suggest that more capital mobility in developing countries affects growth negatively, whereas it possibly stimulates growth in developed countries.
    Keywords: Economic Growth, Capital Mobility, Dynamic Panel
    JEL: F32 F43 C33
    Date: 2010–11
  5. By: Mali Chivakul; Ricardo Llaudes; Ferhan Salman
    Abstract: This paper examines the impact of the recent global crisis on emerging market economies (EMs). Our cross-country analysis shows that the impact of the crisis was more pronounced in those EMs that had initial weaker fundamentals and greater financial and trade linkages. This effect is observed along a number of dimensions, such as growth, stock market performance, sovereign spreads, and credit growth. This paper also shows that during this crisis, pre-crisis reserve holdings helped to mitigate the initial growth collapse. This finding contrasts with other studies that fail to find a significant relationship between reserves and the growth decline. This paper argues that our preferred measure of impact is a more accurate reflection of the true impact of the crisis on EMs.
    Keywords: Credit , Cross country analysis , Economic growth , Economic recession , Emerging markets , Financial crisis , Global Financial Crisis 2008-2009 , Reserves , Sovereign debt ,
    Date: 2010–10–19
  6. By: Charalambos G. Tsangarides
    Abstract: This paper examines the role of the exchange rate regime in explaining how emerging market economies fared in the recent global financial crisis, particularly in terms of output losses and growth resilience. After controlling for regime switches during the crisis, using alternative definitions for pegs, and taking account of other likely determinants, we find that the growth performance for pegs was not different from that of floats during the crisis. For the recovery period 2010-11, pegs appear to be faring worse, with growth recovering more slowly than floats. These results suggest an asymmetric effect of the regime during and recovering from the crisis. We also find that proxies of the trade and financial channels are important determinants of growth performance during the crisis, while only the trade channel appears important for the recovery thus far.
    Keywords: Currency pegs , Economic growth , Economic recovery , Emerging markets , Exchange rate regimes , Financial crisis , Floating exchange rates , Global Financial Crisis 2008-2009 ,
    Date: 2010–10–26
  7. By: Leonor Coutinho; Luc De Wulf; Santiago Florez; Cyrus Sassanpour
    Abstract: Until the early 1990s, the discussions on fiscal policy primarily centered on the functions of economic stabilization, income redistribution and resource allocation. Long-term growth was not usually viewed as an end itself, and fiscal policy was often not sufficiently tailored to the different circumstances and priorities of countries at different stages of development. It is only relatively recently that the discussion has gradually focused on the links between different dimensions of quality of public finances and economic growth. Based on the conceptual framework for linking the quality of public finances and economic growth that has been developed by the European Commission and applied to the EU Member States, this study examines the conditions under which the budgetary policy, and more specifically expenditure, revenue and financing design would be supportive of growth in the Mediterranean partner countries of the European Union. The study also highlights some of the interlinkages between fiscal policy and growth and summarises empirical findings found in the literature with particular focus on Mediterranean partner countries of the European Union. The main findings of the study are similar to those that apply to the EU Member States and can be summarised as follows: • The way government expenditures are financed matters. Deficit and debt financing clearly undermines growth performance. • The composition of expenditure does matter however the efficiency of the expenditure undertaken is even more important for growth. For countries with good governance indicators the positive impact of the productive expenditures on growth was enhanced. The analysis was applied to the efficiency of education and health expenditures with basically similar results. • Notwithstanding the importance of 'fair' income distribution, when tax policy relies heavily on income taxation to do so, the analysis suggests a likely negative effect on growth. Specifically, consumption taxes were found to depress growth by up to four times less than income taxes. The study concludes by highlighting possible areas in the planning and execution of fiscal policy and governance where growth enhancing interventions can be applied.
    Keywords: public finance, economic growth, Mediterranean region
    JEL: H1 H2 H3 H5 H6 H7 E6 O1 O2 O4
    Date: 2010
  8. By: Pierpaolo Benigno; Paolo Surico; Luca Antonio Ricci
    Abstract: We propose a theory of low-frequency movements in unemployment based on asymmetric real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s.
    Keywords: Business cycles , Economic models , Labor markets , Productivity , Time series , Unemployment , United States , Wage adjustments , Wages ,
    Date: 2010–11–16
  9. By: Ravindra H. Dholakia
    Abstract: Gujarat, West Bengal, Karnataka, Maharashtra, Kerala and Tamil Nadu were the major contributors to the growth acceleration in India after 1991-92. Although the Regional Disparity may increase temporarily, causality test provides support to the hypothesis about spread effects. The Regional growth targets assigned by the 11th Plan in India seem to rely on the spread effects of economic growth acceleration in the better off states to achieve its 9 percent growth target and reduce regional disparity in the long run. To strengthen spread effects, the domestic economy should be further integrated and interlinked with free flow of goods, services and factors of production. [W.P. No. 2009-03-06]
    Keywords: Gujarat, West Bengal, Karnataka, Maharashtra, Kerala, Tamil Nadu
    Date: 2010
  10. By: Channing Arndt; Andres Garcia; Finn Tarp; James Thurlow
    Abstract: While economic growth generally reduces income poverty, there are pronounced differences in the strength of this relationship across countries. Typical explanations for this variation include measurement errors in growth-poverty accounting and countries’ different compositions of economic growth. We explore the additional influence of economic structure in determining a country’s growth-poverty relationship and performance. Using multiplier and structural path analysis, we compare the experiences of Mozambique and Vietnam—two countries with similar levels and compositions of economic growth but divergent poverty outcomes. We find that the structure of the Vietnamese economy more naturally lends itself to generating broad-based growth. A given agricultural demand expansion in Mozambique will, ceteris paribus, achieve much less rural income growth than in Vietnam. Inadequate education, trade and transport systems are found to be more severe structural constraints to poverty reduction in Mozambique than in Vietnam. Investing in these areas can significantly enhance the effectiveness of Mozambican growth to reduce poverty.
    Keywords: poverty, multipliers, structural path analysis, Mozambique, Vietnam
    Date: 2010
  11. By: Reinout De Bock; Daniel Florea; Joël Toujas-Bernate
    Abstract: This paper examines the economic and financial linkages between Morocco and Tunisia and their European partners. Using structural vector autoregressions, we find that growth shocks in European partner countries generate significant responses on growth in Morocco and Tunisia. For Tunisia, exports and, to a much lesser extent, tourism appear to be the major transmission channels. In Morocco, exports, remittances and tourism play relatively equal roles. An analysis with sectoral data supports these results.
    Keywords: Business cycles , Cross country analysis , Economic growth , Economic recession , Europe , Exports , External shocks , Inward remittances , Morocco , Spillovers , Tourism , Tunisia ,
    Date: 2010–10–21
  12. By: Silvia Sgherri; Hanan Morsy
    Abstract: Italy’s deep-rooted structural problems resulted in an unsatisfactory productivity performance and a dismal growth over the last 15 years. The global financial crisis has exacerbated these long-standing weaknesses, taking a heavy toll on Italy’s economy. With output back to its end-2001 level, Italy’s output losses associated with the crisis have been, thus far, about 132 billion of 2000 euro (around 10 percent of precrisis 1998 - 2004 real GDP). About three quarters of these losses are estimated to be due to a shortfall in potential output. Potential output is not expected to rebound to its precrisis trend over the medium term, even though growth is projected to do so within the next two years. In the short-run, the decline in output is mainly accounted for by a collapse in productivity; in the medium term, employment and capital are also likely to be affected, with implications for the longer-term growth and fiscal outlook.
    Date: 2010–11–03
  13. By: M. Ayhan Kose; Christopher Otrok; Raju Huidrom; Thomas Helbling
    Abstract: This paper examines the importance of credit market shocks in driving global business cycles over the period 1988:1-2009:4. We first estimate common components in various macroeconomic and financial variables of the G-7 countries. We then evaluate the role played by credit market shocks using a series of VAR models. Our findings suggest that these shocks have been influential in driving global activity during the latest global recession. Credit shocks originating in the United States also have a significant impact on the evolution of world growth during global recessions.
    Keywords: Business cycles , Capital markets , Credit , Cross country analysis , Economic models , Economic recession , External shocks , Group of seven , Time series , United States ,
    Date: 2010–11–16
  14. By: Conrad, Christian; Karanasos, Menelaos
    Abstract: This paper employs an augmented version of the UECCC GARCH specification proposed in Conrad and Karanasos (2010) which allows for lagged in-mean effects, level effects as well as asymmetries in the conditional variances. In this unified framework we examine the twelve potential intertemporal relationships between inflation, growth and their respective uncertainties using US data. We find that high inflation is detrimental to output growth both directly and indirectly via the nominal uncertainty. Output growth boosts inflation but mainly indirectly through a reduction in real uncertainty. Our findings highlight that macroeconomic performance affects nominal and real uncertainty in many ways and that the bidirectional relation between inflation and growth works to a large extend indirectly via the uncertainty channel.
    Keywords: Bivariate GARCH process; volatility feedback; inflation uncertainty; output variability
    JEL: E31 C51 C32
    Date: 2010–11–26

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