nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒02‒12
eleven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Impact of economic growth and financial development on exports: Cointegration and causality analysis in Pakistan By Shahbaz, Muhammad; Rahman, Mizanur
  2. Does financial instability weaken the finance-growth nexus? A case for Pakistan By Shahbaz, Muhammad; Malik, Muhammad Nasir
  3. Channels Through Which Human Capital Inequality Influences Economic Growth By Amparo Castelló-Climent
  4. A Generalized Fact and Model of Long-Run Economic Growth: Kaldor Fact as a Special Case By Daniel Danxia Xie
  5. Financial Development, Economic Efficiency and Productivity Growth: Evidence from China By Sylviane Guillaumont Jeanneney; Ping Hua; Zhicheng Liang
  6. On Uneven Ground: How Corporate Governance Prioritizes Short-term Speculative Investments, Impedes Productive Investments, and Jeopardizes Productivity Growth By Christian E. Weller; Luke Reidenbach
  7. Wohlstand ohne Wachstum: Ein Literaturüberblick By Pennekamp, Johannes
  8. Entrepreneurship, structural change, and economic growth By Florian Noseleit
  9. Central-Bank Government Relationship in the Context of Emerging Economic Environment By P. B. Jauasundera
  10. Transition to FDI openness: reconciling theory and evidence By Ellen R. McGrattan
  11. Multinational Banking in Europe - Financial Stability and Regulatory Implications: Lessons from the financial crisis By Barba Navaretti, Giorgio; Calzolari, Giacomo; Pozzolo, Alberto Franco

  1. By: Shahbaz, Muhammad; Rahman, Mizanur
    Abstract: The analysis shows cointegration between exports, economic growth and financial development in case of Pakistan. The results that economic growth and financial development stimulate rate of exports growth in Pakistan. The causality analysis reveals bidirectional causal relationship between financial development and economic growth, financial development and exports and exports and economic growth in case of Pakistan.
    Keywords: Economic growth; financial development; Cointegration; Pakistan
    JEL: C13 C22 A10
    Date: 2011–02–03
  2. By: Shahbaz, Muhammad; Malik, Muhammad Nasir
    Abstract: The paper investigates whether financial instability weakens finance-growth nexus in case of Pakistan. In doing so ARDL bounds testing approach is used for cointegration among variables over the period of 1971-2005. The results show that financial instability does weaken finance-growth nexus. Trade openness increases economic growth through spillover effects. Increasing inflation retards economic growth i.e., lower inflation rates are necessary for sustained economic growth. Political instability impedes economic growth. The present study indicates new direction for policy makers to sustain the pace of economic growth and avoid financial crisis.
    Keywords: Financial Crisis; Financial Development; Economic Growth
    JEL: N1 O11 E44
    Date: 2011–02–05
  3. By: Amparo Castelló-Climent (Institute of International Economics, University of Valencia)
    Abstract: This paper empirically investigates the theoretical predictions of some of the channels through which human capital inequality may discourage investment and growth. In a cross-section of countries over the period 1960-2000, findings reveal that, all other things being equal, a greater degree of human capital inequality increases fertility rates and reduces life expectancy, which in turn hampers the accumulation rates of human capital. This effect is reinforced in the countries where individuals find it difficult to access credit. Extensive sensitivity analyses show the results are robust across specifications and are not driven by atypical observations, endogenous regressors or unobservable heterogeneity.
    Keywords: Human capital inequality, structural form, investment rates, economic growth
    JEL: O1 O4
    Date: 2011–01
  4. By: Daniel Danxia Xie (Peterson Institute for International Economics)
    Abstract: This paper provides new evidence on the long-run relationship between economic growth and labor's share in national income, based on a comprehensive panel data set for 123 countries from 1950 to 2004. Xie's primary finding is that labor's share follows a cubic relationship with real GDP per capita over the long process of development. At the beginning of the modern economic growth process, the share of labor in national income first decreases until an initial threshold is reached. After that, labor's share keeps increasing until the country's GDP per capita reaches a second threshold before falling again. Xie argues that these dynamics apply not only to the less developed countries in the postwar years, but also to the advanced countries like the United States and the United Kingdom during their early economic take-offs, starting in the late 18th and 19th century, respectively. Finally, he proposes a two-sector constant elasticity of substitution (CES)-type growth model and simulate the model to replicate and explain the possible mechanism behind such a nonlinear pattern of movements in labor's share.
    Keywords: Constant elasticity of substitution, Kaldor fact, Kuznets curve, Labor's share, Structural change
    JEL: O41 P21 E32
    Date: 2011–01
  5. By: Sylviane Guillaumont Jeanneney (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Ping Hua (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Zhicheng Liang (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Financial development may lead to productivity improvement in developing countries. In this paper, based on the Data Envelopment Analysis (DEA) approach, we use the Malmquist index to measure China's total factor productivity change and its two components (i.e., efficiency change and technical progress). We find that China has recorded an increase in total factor productivity from 1993 to 2001, and that productivity growth was mostly attributed to technical progress, rather than to improvement in efficiency. Moreover, using panel data set covering 29 Chinese provinces over the period of 1993-2001 and applying the Generalized-Method-of-Moment system estimation, we investigate the impact of financial development on productivity growth in China. Empirical results show that, during this period, financial development has significantly contributed to China's productivity growth, mainly through its favourable effect on efficiency.
    Keywords: Financial Development;total factor productivity;Chinese Economy
    Date: 2011–02–03
  6. By: Christian E. Weller; Luke Reidenbach
    Abstract: <p>The economic recovery after the Great Recession highlighted a continuous divergence between soaring profits and lagging investment. These trends are related at the corporate level, where corporate managers have stronger incentives to pursue short-term profit-seeking activities than to invest in longer-term productive activities, such as hiring and training people and investment in physical infrastructure. This prioritization results because the corporate governance system is biased towards the short run. The policy goals that we discuss aim to find a better economic balance between short-run and long-run goals by defining long-term performance measures and finding a better balance in the incentives of short-run and long-run oriented corporate stakeholders.</p>
    Keywords: Business investment; corporate governance; short-term speculation; long-term productivity growth
    Date: 2011
  7. By: Pennekamp, Johannes
    Abstract: Ist gesellschaftlicher Wohlstand ohne ökonomisches Wachstum möglich? Dieses Paper gibt einen Überblick über jüngere wissenschaftliche Veröffentlichungen zum Thema. Schwerpunkte sind Begründungen und Ausprägungen von Wachstumsskepsis, alternative Wohlstandsindikatoren und Alternativen zur Wachstumsökonomie. Deutlich wird dabei ein Manko an makroökonomisch fundierten Modellen einer Postwachstumsökonomie, die Prognosen über die sozioökonomischen Auswirkungen eines Wachstumsverzichts erlauben würden. Nennenswerte Ausnahmen sind der multidisziplinär geprägte Degrowth-Ansatz sowie Peter Victors LowGrow-Modell. Beiden gemein ist die Forderung nach Verkürzung der Arbeitszeit verbunden mit einer Umverteilung von Arbeit. Die Beantwortung der Frage, ob und wie eine Demokratie bei schrumpfender Wirtschaft funktionieren könnte, erfordert weitere Forschung. -- Can there be prosperity without economic growth? This paper provides an overview of the relevant publications of the last decade dealing with this question. Surveyed issues include the reasons for and characteristics of growth-skepticism; alternative welfare indicators; and alternatives to growth economics. Among other things, it is found that there is a lack of macroeconomic models for a post-growth economy that would allow forecasts of the socio-economic impact of low growth. Exceptions are the multidisciplinary concept of 'degrowth' and Peter Victor's LowGrow model. Both advocate working time reduction combined with a redistribution of work. The paper concludes by pointing out a need for further research on how democracy can function with low economic growth, or without it.
    Date: 2011
  8. By: Florian Noseleit
    Abstract: The ability to adjust to structural change is vital to economic development, and entries can be active participants in this process. While the importance of factor reallocations for growth is widely accepted, the role of entrepreneurs in managing these reallocations is rarely, if ever, mentioned in the empirical growth literature. This paper analyzes the role of entrepreneurial activity for adjustments of the sectoral structure and its relevance for regional economic development. The historical framework is the accelerated economic transformation that occurred in industrialized countries during the mid 1970s, resulting in an increasing need to adjust. Based on German data from 1975 to 2002, evidence is presented that sectoral reallocations are an important means for transforming entrepreneurial activity into growth.
    Keywords: Entrepreneurship, new business formation, regional development, structural change
    JEL: L26 M13 O1 O18 R11
    Date: 2011–01
  9. By: P. B. Jauasundera
    Abstract: The relationship between the Central Bank and the Government is based not on a mere legal framework, but also on multifaceted political economic considerations. Although in many respects the Central Bank is independent, it has become an integral part of the Government, particularly in managing macroeconomic challenges. The recent financial crisis in most advanced countries has put the Central Banks and Governments on to one mission and to work in close collaboration. [60th Anniversary Oration of the Bank of Sri Lanka]
    Keywords: central bank, financial crisis, central bank-government relationship, South Asia, Sri Lanka
    Date: 2011
  10. By: Ellen R. McGrattan
    Abstract: Empirical studies quantifying the economic effects of increased foreign direct investment (FDI) have not provided conclusive evidence that they are positive, as theory predicts. This paper shows that the lack of empirical evidence is consistent with theory if countries are in transition to FDI openness. Anticipated welfare gains lead to temporary declines in domestic investment and employment. Also, growth measures miss some intangible FDI, which is expensed from company profits. The reconciliation of theory and evidence is accomplished with a multicountry dynamic general equilibrium model parameterized with data from a sample of 104 countries during 1980–2005. Although no systematic benefits of FDI openness are found, the model demonstrates that the eventual gains in growth and welfare can be huge, especially for small countries.
    Date: 2011
  11. By: Barba Navaretti, Giorgio; Calzolari, Giacomo; Pozzolo, Alberto Franco
    Abstract: This paper examines whether multinational banks have a stabilising or a destabilising role during times of financial distress. With a focus on Europe, it looks at how these banks’ foreign affiliates have been faring during the recent financial crisis. It finds that retail and corporate lending of these foreign affiliates has been stable and even increasing between 2007 and 2009. This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units. The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis. This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks’ internal capital markets. In light of these findings, this paper supports the call for an integration of the European supervisory and regulatory framework overseeing multinational banks. The analysis is based on an analytical framework which derives the main conditions under which the internal capital market can perform this support function under idiosyncratic and systemic stresses. The empirical evidence uses both aggregate evidence on foreign claims worldwide, and firm-level evidence on the behaviour of banking groups’ affiliates, compared to standing alone national banks.
    Keywords: Geographical diversification, Corporate diversification, Multinational banking, Foreign Direct Investment
    JEL: G2
    Date: 2011–02–01

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