nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒01‒16
fifteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Beyond the Crisis: Prospects for Emerging Europe By Zsolt Darvas
  2. The dynamic relationship between private domestic investment, the user cost of capital, and economic growth in Malaysia By Tan, Bee Wah; Tang, Chor Foon
  3. Stochasticity in Population and Economic Growth with Past Dependence. By Tapas Mishra; Claude Diebolt; Mamata Parhi
  4. Franchise Fee, Tax/Subsidy Policies and Economic Growth By Wang, Vey; Lai, Chung-Hui
  5. The effects of unionization in an R&D growth model with (In)determinate equilibrium By Lai, Chung-Hui; Wang, Vey
  6. Does democratic distance matter for cross-country growth interdependence? By Claude Diebolt; Tapas Mishra; Bazoumana Ouattara; Mamata Parhi
  7. A Multi-Sector Version of the Post-Keynesian Growth Model By Ricardo Azevedo Araujo; Joanílio Rodolpho Teixeira
  8. Financial crisis: The incrediable hulk in Indian economic growth and external sector By Bera, Soumitra Kumar
  9. The Stability of Export-led Growth Hypothesis: Evidence from Asia's Four Little Dragons By Tang, Chor Foon; Lai, Yew Wah
  10. Togo growth diagnostics By Lundstrom, Susanna; Garrido, Leonardo
  11. The stability and growth pact: lessons from the great recession. By Larch, Martin; Van den Noord, Paul; Jonung, Lars
  12. Change-over within little scope: On the decision neutrality of recent tax reform proposals By Siemers, Lars-H. R.; Zöller, Daniel
  13. Growth and the Optimal Carbon Tax: When to switch from exhaustible resources to renewables? By Frederick van der Ploeg; Cees Withagen
  14. On the Response of Economic Aggregates to Monetary Policy Shocks By Zainab Jehan; Abdul Rashid
  15. Open For Business? Institutions, Business Environment and Economic Development By Robert Gillanders; Karl Whelan

  1. By: Zsolt Darvas
    Abstract: This paper assesses the impact of the 2008-09 global financial and economic crisis on the medium-term growth prospects of the countries of central and eastern Europe, the Caucasus and Central Asia, which began an economic transition about two decades ago. We use cross-country growth regressions, putting special emphasis on a proper consideration of the crisis and robustness. We find that the crisis has had a major impact on the within-sample fit of the models used and that the positive impact of EU enlargement on growth is smaller than previous research has shown. The crisis has also altered the future growth prospects of the countries studied, even in the optimistic but unrealistic case of a return to pre-crisis capital inflows and credit booms.
    Keywords: crisis, economic growth, growth regressions, transition countries
    JEL: C31 C33 O47
    Date: 2010–12–22
  2. By: Tan, Bee Wah; Tang, Chor Foon
    Abstract: This study attempts to examine the dynamic relationship between private domestic investment (PDI), the user cost of capital, and economic growth in Malaysia over the period of 1970 to 2009. Johansen cointegration test suggests that PDI, the user cost of capital, and economic growth are cointegrated in Malaysia. Granger causality test reveals that there is a uni-directional causality running from PDI to economic growth and also from PDI to the user cost of capital in the long run. Moreover, there is a bi-directional causal relationship between economic growth and the user cost of capital in the long run. Meanwhile, there is a strong evidence of a bi-directional causality between PDI, economic growth, and the user cost of capital in the short run. For completeness, variance decomposition is also generated and the results suggest that PDI is more important than the user cost of capital in explaining the variation of economic growth. Finally, the impulse response function confirmed that a shock in the user cost capital exerts a negative effect on PDI and economic growth in Malaysia.
    Keywords: Causality; Cointegration; Economic growth; Private domestic investment
    JEL: O53 E22 O16 C22
    Date: 2011
  3. By: Tapas Mishra (Department of Economics, Swansea University, UK.); Claude Diebolt (BETA/CNRS, Université de Strasbourg, France.); Mamata Parhi (Department of Economics, Swansea University, UK.)
    Date: 2010
  4. By: Wang, Vey; Lai, Chung-Hui
    Abstract: In this paper, we take a new look at the effects of the subsidy policy and the government’s R&D activities in an R&D-based growth model. The government not only subsidizes the R&D cost of the firms but also engages in R&D activities and, in addition, levies a specific tax on the firms producing the final and the intermediate goods, respectively, in order to finance the expenditure. We find that in the economy there exist two balanced equilibrium growth paths. In an economy with a high growth path, the government’s subsidy policy and its R&D activities will crowd out the private R&D activities, and hence the fiscal policies are of no help to the economic growth. In other words, the intermediate goods firms play an important role in driving the economic growth. By contrast, in an economy with a low growth path, the government that directly engages in R&D activities plays an important role in economic growth. The fiscal policies of the government have a positive effect on the economic growth.
    Keywords: Government’s R&D activities; Specific tax; Subsidy policy; Endogenous growth; R&D
    JEL: O30 O40 L00
    Date: 2010–06–27
  5. By: Lai, Chung-Hui; Wang, Vey
    Abstract: This paper extends an R&D-based growth model of the Rivera-Batiz and Romer-type [Quarterly Journal of Economics 106 (1991) 531] endogenous growth model by embodying a union with elastic labor to investigate the effects of unionization on employment and growth by highlighting the essence of internal conflict within the union. It is shown that an increase in the union’s bargaining power or a union which is more employment-oriented boosts employment and economic growth when the balanced growth equilibrium is determinate. On the other hand, if the union is more wage-oriented, employment and economic growth are enhanced when the balanced growth equilibrium is indeterminate.
    Keywords: Union; Collective bargaining; R&D; Indeterminacy; Economic growth
    JEL: O30 O40 J50
    Date: 2010–11–07
  6. By: Claude Diebolt (BETA/CNRS, Université de Strasbourg, France.); Tapas Mishra (Department of Economics, Swansea University, UK.); Bazoumana Ouattara (Department of Economics, Swansea University, UK.); Mamata Parhi (Department of Economics, Swansea University, UK.)
    Date: 2010
  7. By: Ricardo Azevedo Araujo (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília); Joanílio Rodolpho Teixeira (Departamento de Economia (Department of Economics) Faculdade de Economia, Administração, Contabilidade e Ciência da Informação e Documentação (FACE) (Faculty of Economics, Administration, Accounting and Information Science) Universidade de Brasília)
    Abstract: With this inquiry we seek to develop a disaggregated version of the post-Keynesian approach to economic growth, by showing that indeed it can be treated as a particular case of the Pasinettian model of structural change and economic expansion. By relying upon vertical integration becomes possible to carry out the analysis initiated by Kaldor (1956) and Robinson (1956, 1962), and followed by Dutt (1984), Rowthorn (1982) and later Bhaduri and Marglin (1990) in a multi-sectoral model in which demand and productivity increase at different rates in each sector. By adopting this approach it is possible to show that the structural economic dynamics is conditioned not only to patterns of evolution of demand and diffusion of technological progress but also to the distributive features of the economy that can give rise to different regimes of economic growth. Besides we find it possible to determine the natural rate of profit that makes the mark-up rate to be constant over time.
    Keywords: Post-Keynesian growth model, structural change, multi-sector models
    JEL: E21 O11
    Date: 2010–11
  8. By: Bera, Soumitra Kumar
    Abstract: This paper empirically examines the impact of current world-wide recession on India’s growth. The data for this study were compiled from RBI and Central Statistical Organisation (CSO). The paper has applied regression technique with GDP as dependent variable, while exports, imports, FDI and FII were taken as independent variables. Prior to regression analysis, all the variables are tested for stationarity, applying Augmented Dickey-Fuller (ADF) test. The data sets were also tested for seasonality by applying auxiliary regression. Because of the problem of multicolinearity among the independent variables, three models, dropping one of the highly collinear variables, were estimated. The results suggest that financial crisis has adversely impacted India’s GDP although imports, exports and FDI were found to have exercised stimulating influence through technological spillovers and other externalities. The paper suggests that recovery of global economy is extremely important for Indian economic growth although the effects of global slow down could be minimized through the use of stimulant fiscal and monetary measures.
    Keywords: The impact on the world economy; Impact on Indian Economy; Impact on External Sector; Data Sources and Methodology; Regression Analysis: Discussion and Interpretation; Seasonality test; Regression Results and discussion; Conclusions
    JEL: F37 O47 P45 O16 F43
    Date: 2010–04–22
  9. By: Tang, Chor Foon; Lai, Yew Wah
    Abstract: The objective of this study is to re-investigate the export-led growth hypothesis for Asia’s Four Little Dragons using cointegration and rolling causality analyses. Employing both bivariate (exports and GDP) and trivariate (exports, GDP and exchange rate) models, the study finds that exports and GDP are cointegrated for all the four economies, implying that there is a long run relationship between the variables. However, the MWALD causality test results differ between the bivariate and trivariate models. The export-led growth hypothesis is valid only for the case of Hong Kong and Singapore in the bivariate model but valid for all four economies in the trivariate model. Furthermore, the rolling regression-based MWALD test shows that export-led growth in each of the four economies is not stable over their respective period of analysis.
    Keywords: Asia’s Four Little Dragons; Export-led growth; Rolling MWALD test
    JEL: O11 C22 F43
    Date: 2011
  10. By: Lundstrom, Susanna; Garrido, Leonardo
    Abstract: This paper starts by analyzing past growth trends and sources of growth in Togo, as well as the structure of the economic actors in the country. The second part explores the current binding constraints to rapid and sustainable growth. For increased international competitiveness and growth, Togo will need to raise efforts to streamline its costly and cumbersome business procedures. However, for this to have a sizable impact, Togo must prove to potential investors that political stability is permanent and that corruption, poor budget execution and mismanagement of state owned enterprises belongs to the past. As a result of the new government's reform agenda and the return of international aid, a window of opportunities for high returns to the still limited public investments has opened up. This is especially true in infrastructure and connectivity services, which would not only take advantage of Togo's geographical location as a regional hub, but also make growth in Togo more inclusive. And as economic opportunities arise for the private sector, there is a need to restructure the banking sector, which has already started, to smooth distortions in the credit market. Promising sectors within agriculture that are vital to economic growth, employment opportunities, and poverty reduction remain important, but will need to overcome a number of coordination failures. Not least due to the history of government interventions causing economic distortions, the government must allow for a stronger role for private operators and encourage it wherever possible. Finally, although education does not exhibit constraints to economic activity in Togo today, it is of importance to improve the quality of education, not least to profit from and catalyze the opportunities related to Togo's potential as a regional hub.
    Keywords: Economic Theory&Research,Access to Finance,Achieving Shared Growth,Banks&Banking Reform,Debt Markets
    Date: 2010–12–01
  11. By: Larch, Martin; Van den Noord, Paul; Jonung, Lars
    Abstract: While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level.
    Keywords: Stability and Growth Pact; EU; Europe; the euro; Great Recession; fiscal sovereignty
    JEL: E62 E63 H6
    Date: 2010–11
  12. By: Siemers, Lars-H. R.; Zöller, Daniel
    Abstract: Political economy aspects make progressive income taxation and taxation of capital income imperative in practise. International tax competition and profit shifting, in turn, put pressure on corporate and capital taxes. Hence, the scope for a politically feasible change-over to a status of improved taxation is little. We provide an extended dynamic general equilibrium model and analyze politically feasible recent reform proposals referring neutrality. We then propose an alternative tax reform that, in contrast to these proposals, guarantees even growth neutrality, without necessarily jeopardizing political feasibility.
    Keywords: Dynamic general equilibrium models; taxation; tax reform; decision neutrality; ACE; dual income tax
    JEL: H21 H25 H24 D58
    Date: 2011–01–06
  13. By: Frederick van der Ploeg; Cees Withagen
    Abstract: Optimal climate policy is studied in a Ramsey growth model. A developing economy weighs global warming less, hence is more likely to exhaust fossil fuel and exacerbate global warming. The optimal carbon tax is higher for a developed economy. We analyze the optimal time of transition from fossil fuel to renewables, amount of fossil fuel to leave in situ, and carbon tax. Subsidizing a backstop without an optimal carbon tax induces more fossil fuel to be left in situ and a quicker phasing in of renewables, but fossil fuel is depleted more quickly. Global warming need thus not be alleviated.
    Keywords: carbon tax, renewables, exhaustible resources, global warming, growth, intergenerational inequality aversion, second best, Green Paradox
    JEL: D90 E13 Q30 Q42 Q54
    Date: 2010
  14. By: Zainab Jehan; Abdul Rashid
    Abstract: This study empirically investigates how shocks to monetary policy measures (short-term nominal interest rate and broad money supply) affect economic aggregates: output growth, price levels and nominal exchange rate. The study is carried out for Pakistan using quarterly data covering the period from 1980 to 2009. In doing this, Johansen’s (1988) co integration technique and vector error correction model are applied to explore the long-run relationship among the variables. We find significant evidence on the existence of a long-run stable relationship between our monetary measures and economic aggregates. The impulse response functions (IRFs) are computed to examine the response of each macroeconomic variable to a standard deviation shock to monetary measures. The IRF graphs reveal a price puzzle in closed as well as in open economy model. However, an initial appreciation of exchange rate is observed, indicating the overshooting hypothesis phenomenon for Pakistan.
    Keywords: Monetary Policy, Economic Aggregates, VECM, Impulse Response Function.
    JEL: C3 E4 E5
    Date: 2011–01–01
  15. By: Robert Gillanders (University College Dublin); Karl Whelan (University College Dublin)
    Abstract: Recent years have seen a significant focus in the literature on growth and development on the idea that legal and political institutions are the key determinant of economic development. The main finding of this paper is that the focus on the primacy of legal and political institutions may be misplaced and that business-friendly economic policies (proxied for here by the World Bank’s Doing Business indicator) are the key determinant of the level of income per capita. We find that a country’s Doing Business rank dominates a range of measures of legal and political institutional quality as an explanatory variable for income per capita. We also find the Doing Business rank to be a key explanatory variable for economic growth and that previous findings assigning a significant role to educational attainment are not robust to the inclusion of this new indicator in growth regressions.
    Date: 2010–12–31

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