nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒02‒26
sixteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Population Aging, the Composition of Government Spending,and Endogenous Economic Growth in Politico-Economic Equilibrium By Kuehnel, Johanna
  2. How Does Political Instability Affect Economic Growth? By Ari Aisen; Francisco José Veiga
  3. Institutions, Entrepreneurship and Channels to Sustained Economic Growth By Mo, Pak Hung
  4. Long-term effects of population growth on aggregate investment dynamics: selected country evidence for Africa By Simplice A, Asongu
  5. Global Shocks and their Impact on Low-Income Countries: Lessons from theGlobal Financial Crisis By Martin Schindler; Chris Papageorgiou; Hans Weisfeld; Catherine A. Pattillo; Nicola Spatafora; Andrew Berg
  6. Variable Selection and Functional Form Uncertainty in Cross-Country Growth Regressions By Tim Salimans
  7. The Impact of Fiscal Consolidation and Structural Reforms on Growth in Japan By Pelin Berkmen
  8. The Role of Macroeconomic Policy in Rebalancing Growth By J. Morgan, Peter
  9. Military Expenditure and Economic Growth: A Meta-Analysis By Alptekin, Aynur / A; Levine, Paul / P
  10. The Shape of the Income Distribution and Economic Growth: Evidence from Swedish Labor Market Regions By Rooth, Dan-Olof; Stenberg, Anders
  11. The optimal rate of inequality: A framework for the relationship between income inequality and economic growth By Charles-Coll, Jorge A.
  12. Trends in Individual Income Growth: Measurement Methods and British Evidence By Jenkins, Stephen P.; Van Kerm, Philippe
  13. Related lending and banking development By Cull, Robert; Haber, Stephen; Imai, Masami
  14. The Great Recession: US dynamics and spillovers to the world economy By Fabio Bagliano; Claudio Morana
  15. Neoliberalism’s relationship with economic growth in the developing world: Was it the power of the market or the resolution of financial crisis? By Cohen, Joseph N
  16. "China's increasing policy shift towards more sustainable growth" By Prud'homme, Dan

  1. By: Kuehnel, Johanna
    Abstract: This paper introduces a democratic voting process into an OLG economy in order to analyze the effects of a rising old-age dependency ratio on the composition of government spending and endogenous economic growth. Forward-looking agents vote each period on the public policy mix between productive government expenditure and public consumption spending that benefits the elderly. Population aging shifts political power from the young to the old. While this does not affect public productive expenditure, it leads to an increase in public spending on the elderly and a slowdown in economic growth. However, the overall effect on long-term economic growth is positive. This is due to reduced capital dilution or increased saving.
    Keywords: Demographics; Endogenous Economic Growth; Government Spending; Markov Perfect Equilibrium; Probabilistic Voting
    JEL: D72 E62 O41
    Date: 2011–02–17
  2. By: Ari Aisen; Francisco José Veiga
    Abstract: The purpose of this paper is to empirically determine the effects of political instability on economic growth. Using the system-GMM estimator for linear dynamic panel data models on a sample covering up to 169 countries, and 5-year periods from 1960 to 2004, we find that higher degrees of political instability are associated with lower growth rates of GDP per capita. Regarding the channels of transmission, we find that political instability adversely affects growth by lowering the rates of productivity growth and, to a smaller degree, physical and human capital accumulation. Finally, economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect.
    Keywords: Economic growth , Economic models , Education , Human capital , Political economy , Productivity ,
    Date: 2011–01–13
  3. By: Mo, Pak Hung
    Abstract: In this paper, we build a simple model to integrate the findings and/or hypotheses in the diverse literatures related to economic development and growth. They include the literature on institutions attributed to Douglas North (1990), on entrepreneurs, innovations and technical progress attributed to Schumpeter (1934) and on the driving factors of economic growth in various theoretical and empirical contributions. The effort results in a comprehensive theory that is flexible enough to understand broad strategic lessons from diverse growth experiences across country and time. It is also specific enough to reveal the factors, channels, mechanism and the key to sustained economic growth.
    Keywords: Institution; Entrepreneurship; Tools Variety; Technology; Economic Growth
    JEL: O4
    Date: 2011–01
  4. By: Simplice A, Asongu
    Abstract: The role of Africa in world demographic change is primary and consequences on future investment dynamics could provide some insight on how unemployment, economic migration and other issues resulting there-from could be addressed. Using Johansen and Granger-causality models on data from 1977 to 2007, we investigate long-term effects of population growth on investment. Our study reinforces the lack of consensus over the impact of demographic change on economic growth. Main findings are, in the long-run, population growth will: (1) decrease foreign and public investments in Ivory Coast; (2) increase public and private investments in Swaziland; (3) deplete public investment but augment domestic investment in Zambia; (4) diminish private investment and improve domestic investment in the Congo Republic and Sudan respectively. For policy implications, the positive linkage of population growth to investment growth in the long-term should be treated with extreme caution, unless investment measures are adopted to utilize accruing work force. Family planning and birth control policies could also be considered in countries with little future investment avenues.
    Keywords: Productivity; investment; human capital; causality; Africa.
    JEL: O10 J00 C30 O40
    Date: 2011–01–15
  5. By: Martin Schindler; Chris Papageorgiou; Hans Weisfeld; Catherine A. Pattillo; Nicola Spatafora; Andrew Berg
    Abstract: This paper investigates the short-run effects of the 2007-09 global financial crisis on growth in (mainly non-fuel exporting) low-income countries (LICs). Four conclusions stand out. First, for many individual LICs, 2009 was not extraordinarily calamitous; however, aggregate LIC output declined sharply because LICs were unusually synchronized. Second, the growth declines are on average well explained by the decline in export demand. Third, if the external environment facing LICs improves as forecast, their growth should rebound sharply. Finally, and contrary to received wisdom, there are few robust relationships between the cross-country growth variation and the policy and structural environment; the main exceptions are reserve coverage and labor-market flexibility.
    Keywords: Cross country analysis , Economic growth , Economic models , External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Low-income developing countries ,
    Date: 2011–02–02
  6. By: Tim Salimans (Erasmus University Rotterdam)
    Abstract: Regression analyses of cross-country economic growth data are complicated by two main forms of model uncertainty: the uncertainty in selecting explanatory variables and the uncertainty in specifying the functional form of the regression function. Most discussions in the literature address these problems independently, yet a joint treatment is essential. We perform this joint treatment by extending the linear model to allow for multiple-regime parameter heterogeneity of the type suggested by new growth theory, while addressing the variable selection problem by means of Bayesian model averaging. Controlling for variable selection uncertainty, we confirm the evidence in favor of new growth theory presented in several earlier studies. However, controlling for functional form uncertainty, we find that the effects of many of the explanatory variables identified in the literature are not robust across countries and variable selections.
    Keywords: growth regression; variable selection; model uncertainty; model averaging; semi-parametric Bayes; MCMC
    JEL: C11 C14 C15 O40 O57
    Date: 2011–01–18
  7. By: Pelin Berkmen
    Abstract: With Japan’s public debt reaching historical levels, the need for fiscal consolidation and structural reforms have increased. As fiscal consolidation will require a sustained and large adjustment in the fiscal balance, its growth effect is a concern particularly for the short run. This paper uses the IMF’s Global Integrated Monetary and Fiscal Model to analyze the growth impact of fiscal consolidation and structural reforms. Although fiscal consolidation has short-term costs, the potential long-term benefits are considerable, and reforms that raise potential growth could support consolidation. Simulations show that the external environment also matters but domestic policies should be the priority.
    Keywords: Economic growth , Economic models , Fiscal consolidation , Fiscal policy , Fiscal reforms , Japan , Monetary policy , Taxes ,
    Date: 2011–01–13
  8. By: J. Morgan, Peter (Asian Development Bank Institute)
    Abstract: The aftermath of the global financial crisis of 2007–2009 has called the export-led growth model of Asian economies into question. This paper describes the contribution that macroeconomic policy can make to promote a rebalancing of growth away from dependence on exports to developed economies to a more sustainable pattern of growth centered on domestic and regional demand. This represents a significant departure from the traditional uses of macroeconomic policy to stabilize the economic cycle and achieve stable and low inflation. The evidence suggests that macroeconomic policy can successfully contribute to growth rebalancing. Policy measures not only can affect aggregate demand directly, but can also affect it indirectly via their “microeconomic” impacts on private sector behavior. Although in the long-term fiscal policy should be balanced to maintain government debt stability and avoid crowding out of private investment, there may be substantial scope to expand monetary and fiscal policy in the medium-term to offset the deflationary effects of an appreciating currency during periods of current account reversal. Previous experience suggests that most of the needed stimulus can be provided by monetary policy, with only a supplementary role to be played by fiscal policy. Moreover, Asian economies with large current account surpluses tend to have sufficient fiscal space.
    Keywords: economic growth rebalancing; macroeconomic policy; sustainable economic growth
    JEL: E21 E52 E58 E62 E64 F31 F32 H50 H55 I38
    Date: 2011–02–17
  9. By: Alptekin, Aynur / A; Levine, Paul / P
    Abstract: Meta analysis is conducted to review 32 empirical studies with 169 estimates to find the combined overall effect of military expenditure on economic growth. Using a meta fixed and random effects and regression analysis, our results show that there exists a "genuine" net effect of military expenditure on economic growth. The net combined effect is positive, and the magnitude is very small. The main sources of study-to-study variation in the findings of military expenditure and economic growth literature are attributable to the sample, time periods, and functional forms.
    Keywords: military expenditure; economic growth; meta analysis
    JEL: O11 O41 H50 O47 C42
    Date: 2010–10
  10. By: Rooth, Dan-Olof (Linneaus University); Stenberg, Anders (SOFI, Stockholm University)
    Abstract: We analyze the association between inequality and growth across 72 labor market regions in Sweden 1990-2006. Highly accurate measures of growth and inequality (gini, Q3, p9075, p5010) are derived from population register data. The regional set-up also reduces problems with omitted variable bias and endogeneity found in cross country comparisons since the regions within a country share the same redistributive policies and institutions. The findings suggest that inequality between the 90th and 75th percentiles enhances regional growth. This result no longer holds when we take into account changes in commuting patterns. Although only suggestive, the finding is interesting in that it is consistent with the hypothesis that inequality enhances growth by stimulating commuting incentives.
    Keywords: growth, income distribution, inequality, gini
    JEL: O4 D3 J6
    Date: 2011–02
  11. By: Charles-Coll, Jorge A.
    Abstract: This paper contributes to the debate over the relationship between inequality and growth by proposing that the disparities in empirical studies derive from the fact that they have not accounted for the level of inequality as a factor that can affect the sign of the relationship. An inverted “U” shaped relationship is demonstrated, showing that low levels of inequality exert a positive correlation with economic growth while high levels have a negative one. Additionally, and more importantly, it is demonstrated the existence of an optimal rate of inequality (ORI) that maximizes growth rates and releases the economy from any distortion generated by elevated inequality or taxation. Empirical evidence from a broad panel of countries as well as a bibliometric analysis is presented to validate these propositions.
    Keywords: Inequality, Growth, Redistribution, Optimal Rate of Inequality
    JEL: E25 D31 D33 O15
    Date: 2010–08–27
  12. By: Jenkins, Stephen P. (London School of Economics); Van Kerm, Philippe (CEPS/INSTEAD)
    Abstract: Assessments of whose income growth is the greatest and whose is the smallest are typically based on comparisons of income changes for income groups (e.g. rich versus poor) or income values (e.g. quantiles). However, income group and quantile composition changes over time because of income mobility. To summarize patterns of income growth while also tracking the fortunes of the same individuals, a longitudinal perspective is required. For this case, we develop dominance conditions and summary indices for comparisons of distributions of individual income growth, together with associated methods of estimation and inference. Using these methods and data from the British Household Panel Survey, we study individual income growth for periods between 1991 and 2005. We show that income growth was significantly more pro-poor in the early years of the Labour government than in earlier Conservative years.
    Keywords: individual income growth, pro-poor growth, progressive income growth, income mobility, mobility profile, British Household Panel Survey
    JEL: D31 D63 I32
    Date: 2011–02
  13. By: Cull, Robert; Haber, Stephen; Imai, Masami
    Abstract: Does related lending have positive or negative effects on the development of banking systems? This paper analyzes a unique cross-country data set covering 74 countries from 1990 to 2007, and finds that related lending, on average, does not have any effect on the growth of credit. The authors do find, however, that there are conditional relationships: related lending tends to retard the growth of banking systems when rule of law is weak, while it tends to promote the growth of banking systems when rule of law is strong. They also find that related lending appears to be associated with looting when banks are owned by non-financial firms, but that it does not when non-financial firms are owned by banks. The results indicate that whether related lending is positive or pernicious depends critically on the institutional context in which it takes place; there is no single"best policy"regarding related lending. These findings are robust to alternative specifications, including instrumental variable regressions.
    Keywords: Banks&Banking Reform,Debt Markets,Bankruptcy and Resolution of Financial Distress,Labor Policies,Economic Theory&Research
    Date: 2011–02–01
  14. By: Fabio Bagliano (University of Turin and CeRP); Claudio Morana (Università del Piemonte Orientale and CeRP)
    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 transmission 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: 2010–11
  15. By: Cohen, Joseph N
    Abstract: Between 1995 and 2007, the world’s economies embraced neoliberal reforms and prospered, a coincidence that is often taken as proof that liberal economies grow faster. A large body of econometric research shows that “freer” economies are more prosperous. I levy two methodological criticisms at this literature that ultimately render a very different picture of pro-market reforms’ relationship with growth. My analysis suggests that neoliberal reforms did not significantly affect growth where they did not ease public financing or encourage foreign investment. The evidence does not suggest that the economic prosperity of the past 20 years is due to economic liberalism per se, but rather the developing world enjoying stabilized macrofinancial systems and a global investment boom. Neoliberal reforms may have helped produce this stability and investment, but systemic financial stabilization was only one of several goals that they pursued. A sober interpretation of the data finds little evidence for believing that economies will prosper as they embrace laissez-faire ideals.
    Keywords: economic freedom; neoliberalism; laissez faire; periodicity; economic growth; economic development; capitalism
    JEL: P11 O4 E61 O21
    Date: 2011–02–15
  16. By: Prud'homme, Dan
    Abstract: Many have increasingly questioned if and how Chinese policy has evolved or will evolve to ensure that the country’s development is not only focused on immediate economic growth, but also economically, socially and environmentally sustainable. This paper addresses this question by tracing key issues in China’s past and current path to development. It finds that China is clearly increasingly shifting its policies to foster more sustainable growth, which provides a good indication that its upcoming policies will head in the same positive direction.
    Keywords: China's sustainable development; China's development policy; China's economic policy; China's social policy; China's environmental policy; China's trade policy; Dan Prud'homme; China's Five Year Plans; China's quality and balanced growth
    JEL: P11 H11 O53 P21 Q56 I38 F14
    Date: 2010–04

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