nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒02‒05
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Imports-economic growth nexus: ARDL approach to cointegration By Islam, Faridul; Adnan Hye, Qazi Muhammad; Shahbaz, Muhammad
  2. Financial development and energy consumption nexus in Malaysia: A multivariate time series analysis By Islam, Faridul; Shahbaz, Muhammad; Alam, Mahmudul
  3. Natural Disasters in a Two-Sector Model of Endogenous Growth By Horii, Ryo; Ikefuji, Masako
  4. Financial integration and growth - Is emerging Europe different? By Christian Friedrich; Isabel Schnabel; Jeromin Zettelmeyer
  5. Microeconomic implications of credit booms: evidence from emerging Europe By Fabrizio Coricelli; Nigel Driffield; Sarmistha Pal; Isabelle Roland
  6. Directed technological change with costly investment and complementarities, and the skill premium By Elena Sochirca; Óscar Afonso; Pedro Mazeda Gil
  7. The Great Recession: US dynamics and spillovers to the world economy By Fabio C. Bagliano; Claudio Morana
  8. The Stability and Growth Pact: Lessons from the Great Recession By Larch, Martin; van den Noord, Paul; Jonung, Lars
  9. A new panel dataset for cross-country analyses of national systems, growth and development (CANA) By Castellacci, Fulvio; Natera, Jose Miguel

  1. By: Islam, Faridul; Adnan Hye, Qazi Muhammad; Shahbaz, Muhammad
    Abstract: This paper implements Auto-Regressive Distributed Lags (ARDL) to cointegration to explore long-run relation; and Granger procedure within Vector Error Correction Model (VECM) to test direction of causality between imports and economic growth for a sample of forty–ten each from high; upper-middle; lower-middle; and low-income–nations. We find long-run bidirectional causality in high-income nations except Japan. For others, we find mixed results .
    Keywords: Imports; ARDL
    JEL: O10
    Date: 2011–01–28
  2. By: Islam, Faridul; Shahbaz, Muhammad; Alam, Mahmudul
    Abstract: Despite a bourgeoning literature on the existence of a long-run relationship between energy consumption and economic growth, the findings have failed to establish clearly the direction of causation. A growing economy needs more energy, which is exacerbated by growing population. Evidence suggests that financial development can reduce overall energy consumption by achieving energy efficiency. Economic growth and energy consumption in Malaysia have been rising in tandem over the past several years. The three public policy objectives of Malaysia are: economic progress, population growth and financial development. It is of interest to the policymakers to understand the dynamic interrelation among the stated objectives. The paper implements Auto Regressive Distributed Lag (ARDL) approach to cointegration to examine the existence of a long-run relationship among the series: energy consumption, population, aggregate production, and financial development for Malaysia; and tests for Granger causality within the Vector Error Correction Model (VECM). The results suggest that energy consumption is influenced by economic growth and financial development, both in the short and the long-run, but the population-energy relation holds only in the long run. The findings have important policy implications for balancing economic growth vis-à-vis energy consumption for Malaysia, as well as other emerging nations.
    Keywords: Financial development; Energy consumption; ARDL; Economic growth
    JEL: C32 Q20 O52 Q43
    Date: 2011–01–19
  3. By: Horii, Ryo (Tohoku University and Yale University); Ikefuji, Masako (Osaka University)
    Abstract: Using an endogenous growth model with physical and human capital accumulation, this paper considers the sustainability of economic growth when the use of a polluting input (e.g., fossil fuels) the risk of capital destruction through natural disasters. We .nd that growth is sustainable only if the tax rate on the polluting input increases over time. The long-term rate of economic growth follows an inverted V-shaped curve relative to the growth rate of the environmental tax, and it is maximized by the least aggressive tax policy from among those that asymptotically eliminate the use of polluting inputs. Moreover, welfare is maximized under an even milder environmental tax policy, especially when the pollutants accumulate gradually.
    JEL: H23 O41 Q54
    Date: 2010–11
  4. By: Christian Friedrich (Graduate Institute for International and Development Studies, Geneva); Isabel Schnabel (Johannes Gutenberg University, Mainz); Jeromin Zettelmeyer (EBRD)
    Abstract: Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyse several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the European Union. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.
    JEL: O1 P2 P5
    Date: 2010–12
  5. By: Fabrizio Coricelli (Université Paris 1, Panthéon-Sorbonne); Nigel Driffield (Aston Business School); Sarmistha Pal (Brunel University); Isabelle Roland (London School of Economics)
    Abstract: While credit is essential for investment, innovation and economic growth, there are risks related to excessive indebtedness in the corporate sector in the form of increased likelihood of financial distress and bankruptcy. The recent global crisis has highlighted the macroeconomic risks of credit booms. This paper focuses on microeconomic implications of high leverage and provides an innovative firm-level approach to endogenously identify the threshold leverage beyond which corporate indebtedness becomes “excessive”. Estimates for emerging central and eastern European countries suggest that total factor productivity (TFP) growth increases with leverage until it reaches a critical threshold. Beyond this threshold, higher leverage lowers TFP growth.
    JEL: O1 P2 P5
    Date: 2010–10
  6. By: Elena Sochirca (Faculdade de Economia, Universidade do Porto); Óscar Afonso (CEF.UP, OBEGEF, Faculdade de Economia, Universidade do Porto); Pedro Mazeda Gil (CEFUP, Faculdade de Economia do Porto, Portugal)
    Abstract: We develop an extended directed technological change model with R&D driven growth to analyze the growth rate, technological-knowledge bias, skill premium and industrial structure, assuming: (i) complementarities between intermediate goods in production, and (ii) internal costly investment. We find that complementarities directly affect equilibrium technological-knowledge bias, both elements influence equilibrium growth rate and neither affects skill premium and industrial structure. We also find that equilibrium skill premium is independent of relative labour endowments, being determined solely by workers' productivities, suggesting that the persisting increase in wage inequality observed in several developed countries over the last decades may have been due to increases in productivity advantages of skilled workers favoured by technological development.
    Keywords: technological-knowledge bias, skill premium, complementarities, costly investment, vertical and horizontal R&D
    JEL: J31 O31 O33 O41
    Date: 2011–01
  7. By: Fabio C. Bagliano; Claudio Morana
    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: 2010–12
  8. By: Larch, Martin (Directorate General for Economic and Financial Affairs, European Commission); van den Noord, Paul (Organisation for Economic Co-operation and Development (OECD)); Jonung, Lars (School of Economics and Management)
    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 H60
    Date: 2011–01–27
  9. By: Castellacci, Fulvio; Natera, Jose Miguel
    Abstract: Missing data represent an important limitation for cross-country analyses of national systems, growth and development. This paper presents a new cross-country panel dataset with no missing value. We make use of a new method of multiple imputation that has recently been developed by Honaker and King (2010) to deal specifically with time-series cross-section data at the country-level. We apply this method to construct a large dataset containing a great number of indicators measuring six key country-specific dimensions: innovation and technological capabilities, education system and human capital, infrastructures, economic competitiveness, political-institutional factors, and social capital. The CANA panel dataset thus obtained provides a rich and complete set of 41 indicators for 134 countries in the period 1980-2008 (for a total of 3886 country-year observations). The empirical analysis shows the reliability of the dataset and its usefulness for cross-country analyses of national systems, growth and development. The new dataset is publicly available.
    Keywords: Missing data; multiple imputation methods; national systems of innovation; social capabilities; economic growth and development; composite indicators.
    JEL: P5 F0 C33 I32 O11 F5 O20 C8 O4 O3
    Date: 2011–01

This nep-fdg issue is ©2011 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.