nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒02‒19
ten papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Inequality and Growth: The Role of Beliefs and Culture By Strieborny Martin
  2. Economic Growth and The Quality of Human Capital By Laabas, Belkacem; Weshah, Razzak
  3. Real effects of inflation uncertainty in the US By Mustafa Caglayan; Ozge Kandemir; Kostas Mouratidis
  4. Investment in Relationship-Specific Assets: Does Finance Matter ? By Strieborny Martin; Kukenova Madina
  5. Errors in Variables and the Empirics of Economic Growth By Jean-Louis Arcand; Marcel Dagenais
  6. The Central Banker's Case for Doing More By Adam S. Posen
  7. The Effectiveness of Government Expenditures during Crisis: Evidence from Regional Government Spending in Japan 1990-2000 By Markus Bruckner; Anita Tuladhar
  8. Financial Development, Financial Instability and Poverty By Sylviane Guillaumont Jeanneney; Kangni Kpodar
  9. Lifting the Veil: Regulation and Shadow Banking By Christian Calmes; Raymond Theoret
  10. Uruguay at the mirror. An empirical analysis of the Uruguayan productive structure through the Method of Reflections By Guzmán Ourens

  1. By: Strieborny Martin
    Abstract: In egalitarian countries people believe that luck rather than hard work determines success in life and expect their government to provide both economic growth and social equity. This leads to a stronger dynamic interplay between government interventions, inequality and growth within such countries. The presented results thus confirm the importance of cultural factors and economic beliefs in shaping the inequality-growth link. More fundamentally, the paper demonstrates that cultural background does not only influence the long-run economic outcomes, but can also affect the joint dynamics of real economic variables within countries over time.
    Keywords: culture; inequality; growth
    JEL: O15 O40 P16 Z1
    Date: 2010–11
  2. By: Laabas, Belkacem; Weshah, Razzak
    Abstract: We calibrate an endogenous growth model to study the effect of the quality of human capital on productivity growth in a sample of thirty developed and developing countries for the period 1980 to 2007. We measure quality of human capital by relative cognitive skills. These are country scores in mathematics and science reported in Trends in International Mathematics and Science (TIMMS). The correlation between the relative quality of human capital and productivity growth is evident in the data for the developed countries. And, cross-country differences in the quality of human capital for a number of developed countries are highly positively associated with cross-country differences in productivity growth. The picture is significantly different for the developing countries in our sample.
    Keywords: quality of human capital; economic growth
    JEL: I20 J24 O40 E10
    Date: 2011–02–08
  3. By: Mustafa Caglayan; Ozge Kandemir; Kostas Mouratidis (Department of Economics, The University of Sheffield)
    Abstract: We empirically investigate the effects of inflation uncertainty on output growth for the US using both monthly and quarterly data over 1985-2009. Employing a Markov regime switching approach to model output dynamics, we show that inflation uncertainty obtained from a Markov regime switching GARCH model exerts a negative and regime dependant impact on output growth. In particular, we show that the negative impact of inflation uncertainty on output growth is almost 4.5 times higher during the low growth regime than that during the high growth regime. We verify the robustness of our findings using quarterly data
    Keywords: Growth, inflation uncertainty, Markov-switching modeling, Markov-switching GARCH
    JEL: E31 E32
    Date: 2011–02
  4. By: Strieborny Martin; Kukenova Madina
    Abstract: Existing literature sees opportunistic behaviour of contractual partners as the main reason why rational agents underinvest in relationship-specific assets. We look beyond this well-know holdup problem and argue that financial vulnerability and short-term planning horizon can also lead to such underinvestment. Subsequently, banks can stimulate growth-enhancing investment in relationship-specific assets by signalling creditworthiness and long-term planning horizon of their borrowers. We empirically confum this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector. Our work establishes a novel channel through which finance affects the real economy. It also complements the literature that has stressed legally binding contracts as a standard way to promote investment in relationship-specific assets.
    Keywords: financial development; relationship-specific investment; growth
    JEL: G21 O16 O40
    Date: 2011–01
  5. By: Jean-Louis Arcand (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Marcel Dagenais (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: We examine cross-sectional empirical evidence on the determinants of economic growth in light of an instrumental variables estimator, based on sample moments of order higher than two, which does not require extraneous instruments and which remains consistent, under quite reasonable assumptions, when measurement errors affect the explanatory variables. We focus on several in‡fluential papers — Barro (1991), Mankiw, Romer, and Weil (1992), Sachs and Warner (1997a), Easterly and Levine (1997), Levine and Zervos (1998)— and find that many of their results are “fragile”. We argue that the application of our estimator to cross-sectional empirical studies of the determinants of growth yields important insights which may qualify previous findings in the literature, especially given the errors in variables problems which are known to plague commonly used cross-sectional datasets.
    Keywords: errors in variables;economic growth
    Date: 2011–02–09
  6. By: Adam S. Posen (Peterson Institute for International Economics)
    Abstract: Adam S. Posen presents his view on the role of monetary policy in the global economic recovery, in particular in the large Western countries, and whether the major central banks in the United Kingdom and beyond should be doing more in the coming months. Posen argues that monetary policy should continue to be aggressive about promoting recovery, and further quantitative easing should be undertaken. Policymakers face a clear and sustained uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver the desired sustained recovery on its own. In every major economy, actual output has fallen so much versus where trend growth would have put them, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and what it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation. If price stability is at risk over the medium term, it is on the downside. There are, however, some very serious risks if policy errors are made by tightening prematurely or even by loosening insufficiently. The risks that Posen believes the United Kingdom and other major Western countries face now are those of sustained low growth and near deflation turning into a self-fulfilling prophecy (as in Japan in the 1990s and in the United States and Europe in the 1930s) and/or of inducing a political reaction that could undermine these countries' long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy's productive capacity and by investors to avoid risk and prefer cash. These tendencies are already present, and insufficient monetary response is likely to worsen them. The combination of these risks with the potential attainable gains motivates Posen's call for additional monetary policy stimulus.
    Date: 2010–10
  7. By: Markus Bruckner (School of Economics, University of Adelaide); Anita Tuladhar (International Monetary Fund)
    Abstract: We use a rich dataset of regional government expenditures for Japan during the 1990-2000 period to estimate from within-prefecture variation the multiplier of government investment and government consumption expenditures. Our main finding is that government spending did not have multipliers effects that are on average larger than one. Government investment had a positive and significant effect on output that was quantitatively larger than the effect of government consumption expenditures. Government personnel expenditures and transfers to households had significant negative output effects while transfers to firms produced positive multiplier effects that were significantly larger than one. Our findings are consistent with macro model that emphasize the supplyside effects of fiscal policy during times of financial crisis.
    Keywords: fiscal policy, fiscal multipliers
    JEL: E62 H30
    Date: 2011–02
  8. By: Sylviane Guillaumont Jeanneney (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Kangni Kpodar (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: This article investigates how financial development is beneficial to the reduction of poverty, on the one hand by promoting growth and in the other hand directly by the McKinnon conduit effect. At the same time, however, financial instability which accompanies financial development is detrimental to the poor and dampens the positive effect of financial development on the reduction of poverty. These hypotheses are tested successfully on a sample of developing countries over the period 1966-2000, resulting in straightforward policy implications.
    Keywords: cerdi
    Date: 2011–02–09
  9. By: Christian Calmes (Université du Québec en Outaouais); Raymond Theoret (Université du Québec en Outaouais)
    Abstract: The growth of shadow banking in recent decades has changed the concept of banking. It has meant less deposit-taking and lending and more market-oriented banking activities, including in particular a growing trade in securitized products. However, shadow banking is opaque; a problem that was underlined in the recent financial crisis. Does the experience of the financial crisis and its links to the riskiness of banking mean bank re-regulation is necessary? In the Canadian context at least, better reporting of bank risk seems to be a more appropriate way than re-regulation to prevent financial turmoil from arising in this area. Market-oriented operations should be more exposed to daylight, to enable a better evaluation of true bank risk, and regulatory agencies should require detailed reports on activities generating noninterest income. Better indicators of leverage need also to be developed, owing to leverage’s role as the principal channel of bank risk-taking.
    Keywords: Financial Services, shadow banking system, Canadian banking system, regulation, subprime mortgage crisis
    JEL: G21 G24 G28
    Date: 2011–01
  10. By: Guzmán Ourens (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: Many Works have pointed at Uruguayan productive structure, as one of the main causes of the country’s low long term growth rate. This paper presents a different empirical view of the relationship using recent developments proposed by Hausmann and Hidalgo (2009). Their Method of Reflections allows an approximation to the level of complexity that a productive structure has, and therefore their indicators yield hints to that economy’s future growth. Results show that Uruguay has never reached the production of sophisticated products, and it has even moved away from the most sophisticated products it has ever reached in the period 1962-2008. As a consequence, Uruguayan level of productive structure complexity exhibit a lowering trend, especially after 1994, which calls attention for industrial policy if the recent path of high growth is to be maintained.
    Keywords: Convergence, Structural Change, Technological Capabilities, Method of Reflections.
    JEL: F19 O14 O33 O54
    Date: 2010–12

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