nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒03‒19
fifteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Growth Effects of Fiscal Policies: A Critical Appraisal of Colombier’s (2009) Study By Bergh, Andreas; Öhrn, Nina
  2. Revisiting the relationship between electricity consumption, capital and economic growth: Cointegration and causality analysis in Romania By Mutascu, Mihai; Shahbaz, Muhammad; Tiwari, Aviral Kumar
  3. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Barbara Annicchiarico; Alessandra Pelloni; Lorenza Rossi
  4. Corruption, Military Spending and Growth By Giorgio d'Agostino; Luca Pieroni; J Paul Dunne
  5. "No-arbitrage Near-Cointegrated VAR(p) Term Structure Models, Term Premia and GDP Growth" By Caroline JARDET ; Alain MONFORT ; Fulvio PEGORARO
  6. Defence Spending and Economic Growth in the EU15 By J Paul Dunne; Eftychia Nikolaidou
  7. Productivity and per capita GDP growth: the role of the forgotten factors By Marattin, Luigi; Salotti, Simone
  8. Tourism, real output and real effective exchange rate in Malaysia: a view from rolling sub-samples By Tang, Chor Foon
  9. Impacts of Population and Income Growth Rates on Threatened Mammals and Birds By Pandit, Ram; Laband, David
  10. The Role of Housing Tax Provisions in the 2008 Financial Crisis By Thomas Hemmelgarn; Gaetan Nicodeme; Ernesto Zangari
  11. Does a Rising Tide Lift All Boats? Welfare Consequences of Asymmetric Growth By Murphy, Daniel P
  12. Structural change and the Kaldor facts in a growth model with relative price effects and non-Gorman preferences By Timo Boppart
  13. Temporal Granger causality and the dynamics examination on the tourism-growth nexus in Malaysia By Tang, Chor Foon
  14. Induced Innovation, Endogenous Growth, and Income Distribution: a Model along Classical Lines By Luca Zamparelli
  15. 28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession By de Carvalho Filho, Irineu

  1. By: Bergh, Andreas (Research Institute of Industrial Economics (IFN)); Öhrn, Nina (Research Institute of Industrial Economics (IFN))
    Abstract: In a recent paper, Colombier (2009) uses a robust estimation technique and claims to find empirical evidence that government size has not been detrimental to growth for OECD countries during the 1970 to 2001 period, and that endogenous growth theory is not corroborated. We examine the robustness of these findings, and show that Colombier’s results differ from those in other recent papers not because of the estimator used, but because of the exclusion of other control variables. Adding time fixed effects to Colombier’s data set, and using the same econometric method, we obtain results in line with other findings, corroborating endogenous growth theory. Adding further control variables illustrates the robustness of the negative correlation between total tax revenue and economic growth for both instrumented and non-instrumented regressions.
    Keywords: Economic growth; Government size; Taxation; Robust estimators; Panel data
    JEL: E62 H11 H20 O43
    Date: 2011–03–03
  2. By: Mutascu, Mihai; Shahbaz, Muhammad; Tiwari, Aviral Kumar
    Abstract: The paper empirically analyzes, in the Romania’s case, the cointegration and causality between electricity consumption, capital and economic growth. The data set is covering the period 1980 - 2008. The results show the existence of bidirectional causality between electricity consumption and economic growth and between economic growth and capital use. In the same time, a unidirectional causal relation is also found from capital use to electricity consumption. The main finding suggests that electricity conservation policies may retard economic growth by reduction in electricity consumption. Moreover, in the opposite direction, from economic growth to electricity consumption, the fluctuations in economic growth may reduce demand for electricity.
    Keywords: Electricity Consumption; Growth; Cointegration
    JEL: F15 O16 B29
    Date: 2011–02–01
  3. By: Barbara Annicchiarico (Faculty of Economics, University of Rome "Tor Vergata"); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Lorenza Rossi (University of Pavia)
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii) the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth, volatility, business cycle, monetary policy
    JEL: E32 E52 O42
    Date: 2011–03–08
  4. By: Giorgio d'Agostino (Università degli Studi di Roma and UWE, Bristol); Luca Pieroni (University of Perugia and UWE, Bristol); J Paul Dunne (University of the West of England and University of Cape Town)
    Abstract: This paper considers the complementary effect of corruption and military spending on economic growth, analyzing both the direct impact of public spending and effect of allocating resources between categories of public spending within the framework of an endogenous growth model. The non-linearities that emerge from are the result of the links between the components of public spending, corruption and economic growth. The main findings of the empirical analysis confirm the expectation that corruption and military burden lower the growth rate of GDP per capita. They also suggest that when the the complementarity effect between military spending and corruption is omitted, as in most studies, the impact of military burden on economic performance is underestimated.
    Keywords: corruption, military spending, development economics
    JEL: O57 H5 D73
    Date: 2011–03
  5. By: Caroline JARDET ; Alain MONFORT ; Fulvio PEGORARO (Crest)
    Keywords: optimal matching
    Date: 2011–03
  6. By: J Paul Dunne (University of the West of England and University of Cape Town); Eftychia Nikolaidou (CITY College, Thessaloniki, Greece)
    Abstract: Over the last 30 years there has been an impressive amount of empirical work on the defence-growth nexus, using different methodologies, models and econometric techniques and focusing on individual case studies, cross-country studies or panel data studies. Despite the number and the variety of studies, the evidence on the defence-growth relationship is still far from conclusive. Rather surprisingly, very limited work has been published in the relevant literature for the European Union despite the continuous discussions for a Common European Defence Policy that would require an assessment of the economic effects of defence in this region. To fill in the gap in the literature, this paper employs an augmented Solow-Swan model and estimates it both with panel and time series methods to provide empirical evidence on the economic effects of defence spending in the EU15 over the period 1961-2007. Overall, evidence derived from both panel and time series methods is consistent and suggests that military burden does not promote economic growth in this region.
    Keywords: Defence Spending, Economic Growth, Panel data, time series, EU15
    JEL: H56 O40
    Date: 2011–03
  7. By: Marattin, Luigi; Salotti, Simone
    Abstract: Average hourly productivity has often been used to draw conclusions on long run per capita GDP growth, based on the assumption of full utilization of labour resources. In this paper, we argue that a failure to recognize the potentially significant wedges among the two variables – even in the long run - can be misleading. By applying both time series and panel cointegration techniques on data on 19 OECD countries, we fail to reject the hypothesis of absence of a long run common stochastic trend among the two variables in the period 1980-2005. Furthermore, we apply a simple decomposition of GDP growth into five variables, included some related to the supply-side and demographics, so to verify the single contributions to income growth and variance over our period of interest. We conclude that variables that have been so far absent in the growth literature have indeed a non-negligible role in explaining the dynamics of long run per capita GDP growth. In particular, these “forgotten factors” (that we identify with the employment and the activity rates and a demographic ratio) matter more in better performing economies, where we also highlight that productivity has been less important in determining GDP growth than in relatively bad performers.
    Keywords: Growth accounting; productivity; panel cointegration; demographics.
    JEL: O47 E01 O40
    Date: 2010–04
  8. By: Tang, Chor Foon
    Abstract: The objective of this study is to examine the tourism-growth nexus for Malaysia with the cointegration and Granger causality tests. This study covers the monthly data from January 1989 to May 2010. The Johansen’s cointegration and the residuals-based test for cointegration with regime shift consistently suggest that tourist arrivals, real output, and real effective exchange rate in Malaysia are cointegrated. In terms of Granger causality, this study finds different sources of causality. In the short run, real output and real effective exchange rate Granger-cause tourist arrivals, while tourists arrivals also Granger-cause real output and real effective exchange rate. In the long run, this study shows that all the variables are bi-directional causality. Moreover, we also extend the study to analyse the stability of causality between tourism and real output by using rolling regression procedure into the Granger causality test. Interestingly, the rolling Granger causality test demonstrates that the growth-led tourism hypothesis is valid and stable, while tourism-led growth hypothesis is valid and but unstable in particular after 2005. Although tourism contributes to economic growth, it is not a persistence source for long-term economic growth in Malaysia.
    Keywords: tourism-led growth hypothesis; Malaysia; rolling regression
    JEL: O11 C32 O53
    Date: 2011–02
  9. By: Pandit, Ram; Laband, David
    Abstract: Per capita income and human population levels in a country have direct influences on its environmental outcomes. Countries with same level of income may have different rate of income growth and vice versa, suggesting that the influence of the rate of income growth on environmental outcomes could be different than that of income level. Similarly, the rate of population growth might have different impact in addition to the impacts of sheer number of population. We explore this empirical question using country-level data on threatened species published by IUCN for the year 2007. Controlling for other factors, our model estimates the influences of the rate of population and income growth on threatened mammals and birds across 113 continental countries. The results suggest that, among other factors, the rate of population growth has significant influences on number of threatened mammals and birds.
    Keywords: income, population, spatial models, spatial autocorrelation, endemic species, biodiversity, Environmental Economics and Policy, C21, Q57,
    Date: 2011
  10. By: Thomas Hemmelgarn (European Commission); Gaetan Nicodeme (European Commission); Ernesto Zangari (Banca d'Italia)
    Abstract: The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, ending into deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between housing tax provisions and the financial crisis. In particular, it reviews the existing evidence on the links between capital gains taxation of houses, interest mortgage deductibility and characteristics of the crisis.
    Keywords: financial crisis, tax policy, housing, interest deductibility, capital gains
    JEL: E62 G21 H24 H31
    Date: 2011–03
  11. By: Murphy, Daniel P
    Abstract: A common presumption is that increased growth in the aggregate enhances the welfare of both the rich and the poor. I show that instead, as the rich get richer, the welfare of the poor may decline if the underlying growth is asymmetric. There are two distinct and complementary explanations: First, sector-biased, skill-biased technological change, and second, efficiency improvements in the government sector. In the first case, skill-biased technological change in sectors consumed by the skilled rich increases their income beyond the increase in economic wealth, causing a decline in the consumption and welfare of the low-skilled poor. This result stands in contrast to the standard model of skill-biased technological change. In the second case, growth takes the form of improved efficiency in a government sector that is financed by rich taxpayers. The welfare of the low-skilled poor will decline whenever the consumption bundle of the skilled rich embodies more skill intensity than does the production of government services. This analysis demonstrates that a rising tide need not lift all boats and that the exact nature of consumption patterns is important not only for growth and inequality, as has been emphasized in earlier literature, but also for welfare.
    Keywords: economic growth; inequality; skill-biased technological change; public economics
    JEL: O11 H50 I31 O39 J24 J30
    Date: 2011–01
  12. By: Timo Boppart
    Abstract: Growth of per-capita income is associated with (i) significant shifts in the sectoral economic structure, (ii) systematic changes in relative prices and (iii) the Kaldor facts. Moreover, (iv) cross-sectional data shows systematic expenditure structure difference between rich and poor households. Ngai and Pissarides (2006) and Acemoglu and Guerrieri (2008) are consistent with observation (i)-(iii) but abstract form non-homotheticities of preferences. However, they cannot replicate the structural change between the U.S. goods and service sector quantitatively. This paper presents a growth model, which reconciles both forces of structural change - relative price and income effects - with balanced growth on the aggregate. The theory is simple and parsimonious and contains an analytical solution. The model can replicate shape and magnitude of the nonbalanced sectoral facts as well as the balanced nature of growth on the aggregate. In a structural estimation, the model’s functional form is exploited to obtain estimates for the relative importance of income and price effects as determinants of the structural change.
    Keywords: Structural change, relative price effect, non-Gorman preferences, Kaldor facts.
    JEL: O14 O30 O41 D90
    Date: 2011–01
  13. By: Tang, Chor Foon
    Abstract: This study applied the cointegration, error-correction modelling and persistence profile to analyse the dynamic relationship between real tourism receipts, real income and real exchange rate in Malaysia. This study covers the annual sample period from 1974 to 2009. This study finds that the variables are cointegrated. In the short run, this study finds that neutrality causality between real tourism receipts and real income, while they are bi-directional Granger causality in the long run. Nevertheless, this study finds uni-directional causality running from real exchange rate to real tourism receipts and real income in both short- and long run.
    Keywords: Causality; Exchange rate; Malaysia; Tourism-led growth; Persistence profile
    JEL: O11 O53 C22
    Date: 2011–03
  14. By: Luca Zamparelli (Department of Economic Theory, Sapienza University of Rome)
    Abstract: This paper presents a classical micro-founded growth model with endogenous direction and size of technical change. In a standard induced innovation model firms freely adopt productivity improvements from an innovation possibilities frontier describing the trade-off between increasing capital or labor productivity. The shape of the innovation possibility frontier uniquely determines the steady state distribution of income. The model proposed allows firms to choose not only the direction but also the size of innovation by making innovation a costly activity requiring R&D investment. Comparative dynamics analysis shows that income distribution is are sensitive to saving parameters and fiscal policy. In particular, an increase in the discount factor or in subsidy to R&D raises the labor share.
    Keywords: Induced innovation, endogenous growth, direction of technical change, classical growth.
    JEL: D33 O31 O33 O40
    Date: 2011
  15. By: de Carvalho Filho, Irineu
    Abstract: Twenty-eight months after the onset of the global financial crisis of August 2008, the evidence on post-crisis GDP growth emerging from a sample of 51 advanced and emerging countries is flattering for inflation targeting countries relative to their peers. The positive effect of IT is not explained away by plausible pre-crisis determinants of post-crisis performance, such as growth in private credit, ratios of short-term debt to GDP, reserves to short-term debt and reserves to GDP, capital account restrictions, total capital inflows, trade openness, current account balance and exchange rate flexibility, or post-crisis drivers such as the growth performance of trading partners and changes in terms of trade. We find that inflation targeting countries lowered nominal and real interest rates more sharply than other countries; were less likely to face deflation scares; and had sharp real depreciations without a relative deterioration in their risk assessment by markets. While the task of establishing causal relationships from cross-sectional macroeconomics series is daunting, our reading of this evidence is consistent with the resilience of IT countries being related to their ability to loosen their monetary policy when most needed, thereby avoiding deflation scares and the zero lower bound on interest rates.
    Keywords: Inflation targeting; economic crisis; monetary policy; Great Recession
    JEL: E00 E4 E3
    Date: 2011–03

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.