nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒04‒16
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. The Causality of Foreign Direct Investment and Its Effects on Economic Growth: Re-estimated by a Directed Graph Approach By Li, Yarui; Woodard, Joshua D.; Leatham, David J.
  2. Cumulative Causation in a Structural Economic Dynamic Approach to Economic Growth and Uneven Development By Araujo, Ricardo
  3. TFP growth and its determinants: nonparametrics and model averaging By Michael Danquah; Enrique Moral-Benito; Bazoumana Ouattara
  4. What explains cross-country growth in South Asia? Female education and the growth effect of international openness By Arusha Cooray; Sushanta Mallick
  5. How would population growth affect investment in the future? Asymmetric panel causality evidence for Africa. By Simplice A, Asongu
  6. Sectoral composition and macroeconomic dynamics By Jaime Alonso-Carrera; Jordi Caballé; Xavier Raurich
  7. Gazelles, Industry Growth and Structural Change By Bos Jaap W.B.; Stam Erik
  8. Military Spending, Growth, Development and Conflict By J Paul Dunne
  9. On the impact of the TFP growth on the employment rate: does training on-the-job matter? By Moreno-Galbis, Eva
  10. Welfare improving taxation on saving in a growth model By Long Xin; Pelloni Alessandra
  11. The new rules of the Stability and Growth Pact. Threats from heterogeneity and interdependence By Roberto Tamborini
  12. Iceland's Economic and Financial Crisis: Causes, Consequences and Implications By Spruk, Rok
  13. Where are global and U.S. trade heading in the aftermath of the trade collapse: issues and alternative scenarios By Joseph W. Gruber; Filippo di Mauro; Bernd Schnatz; Nico Zorell
  14. A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights By Chu, Angus C.; Lai, Ching-Chong; Liao, Chih-Hsing

  1. By: Li, Yarui; Woodard, Joshua D.; Leatham, David J.
    Abstract: This paper uses the directed acyclic graph approach to analyze the causal patterns among foreign direct investment and other economic, social, and political variables, including GDP per capita as a proxy for economic growth. We find that economic growth causes FDI inflows for developing countries, while FDI induces economic growth for developed countries. Also, stock market is found to be an intermediary that amplifies the influence on FDI from many causal variables of FDI.
    Keywords: FDI, economic growth, DAG, Financial Economics,
    Date: 2011
  2. By: Araujo, Ricardo
    Abstract: The Structural Economic Dynamic approach is distinguished by its simultaneous approach to demand and supply sides of economic growth. However, the idea that growth itself can transform an economy, which became known in the literature as cumulative causation, cannot be properly studied by this framework because technological progress is treated in the same manner as in the traditional Neoclassical model, that is, it is exogenous. Besides, it is the only source of economy growth with no role played by demand in the pace of economic growth but only in the sectoral composition of the economy. Here we introduce Verdoon’s Law in the Pasinetti’s model of structural change thus making it able to study cumulative causation and thus rendering structural changes endogenous in this model.
    Keywords: Cumulative causation; structural change; Verdoon’s law
    JEL: O41 O33
    Date: 2011–03–29
  3. By: Michael Danquah (Swansea University); Enrique Moral-Benito (Bank Of Spain); Bazoumana Ouattara (Swansea University)
    Abstract: Total Factor Productivity (TFP) accounts for a sizeable proportion of the income and growth differences across countries. Two challenges remain to researchers aiming to explain these differences: on the one hand, TFP growth is hard to measure; on the other hand, model uncertainty hampers consensus on its key determinants. This paper combines a non-parametric measure of TFP growth with model averaging techniques to addess both issues. The empirical findings suggest that the most robust TFP growth determinants are unobserved heterogeneity, initial GDP, consumption share, and trade openness. We also investigate the main determinants of the TFP components: efficiency change (i.e. catching up) and technological progress (i.e. innovation).
    Keywords: Productivity, Bayesian Model Averaging, Nonparametric methods
    JEL: O47 C11 C14 C23
    Date: 2011–04
  4. By: Arusha Cooray; Sushanta Mallick
    Abstract: Using cross-country regional data over the 1970-2008 period, this study provides further evidence to the growth literature by exploring human capital formation from a gender dimension in India, Bangladesh, Nepal, Pakistan, Sri Lanka, Bhutan and the Maldives. We use an extended version of the Solow growth model with per capita GDP being a function of the key variables, viz, physical capital accumulation, human capital accumulation, openness to trade and capital flows, fiscal policy and financial development. We also construct two alternative measures for physical capital stock. The key contribution of this study is to show that the impact of human capital disaggregated by gender has a differential impact on economic growth, similar to the result in Barro (2001). While male human capital has a positive significant effect on growth, female human capital has insignificant explanatory power when the openness variables are considered. An implication stemming from this study is that if South Asia were to increase its growth momentum, high priority should be given to encouraging educational opportunities for females in order to maximise the effect of FDI on economic growth.
    Date: 2011
  5. By: Simplice A, Asongu
    Abstract: Our generation is experiencing the greatest demographic transition and Africa is at the center of it. There is mounting concern over rising unemployment and depleting per capita income accruing there-from. We look at the issue in this paper from a long run perspective by examining the nature of the relationship between population growth and a plethora of investment indicators: public, private, foreign and domestic investments. Using asymmetric panels on data spanning from 1977 to 2007, we investigate effects of population growth on investment from Granger causality models. Our findings reveal a long-run positive causal linkage from population growth to only public investment. But for domestic investment, permanent fluctuations in human capital affect changes in other forms of investments. Not unexpected, no significant short-run causal relationship is found. For economic implications, sampled countries should take family planning and birth control policies seriously. Though growth in population may appear not to have an impact on investment in the short spell, in the distant future, it strangles public finances. Therefore measures should be adopted such that, rising unemployment rate resulting from population growth be accommodated by private sector investments. Seemingly, structural adjustments policies implemented by sampled countries have not had the desired investment effects.
    Keywords: Productivity, investment, human capital, asymmetric panel, causality, Africa
    JEL: O10 J00 C33 O40
    Date: 2011–02–14
  6. By: Jaime Alonso-Carrera; Jordi Caballé; Xavier Raurich
    Abstract: We analyze the transitional dynamics of a model with heterogeneous consumption goods. In this model, convergence is driven by two different forces: the typical diminishing returns to capital and the sectoral change inducing the variation in relative prices. We show that this second force affects the growth rate if the two consumption goods are not Edgeworth independent and if these two goods are pro- duced with technologies exhibiting different capital intensities. Because the afore- mentioned dynamic sectoral change arises only under heterogeneous consumption goods, the transitional dynamics of this model exhibits striking differences with the growth model with a single consumption good. We also show that these differences in the transitional dynamics can give raise to large discrepancies in the welfare cost of shocks between the economy with a unique consumption good and the economy with multiple consumption goods.
    Keywords: multi-sector growth models, transitional dynamics, consumption growth.
    JEL: O41 O47
    Date: 2011–04–05
  7. By: Bos Jaap W.B.; Stam Erik (METEOR)
    Abstract: This paper examines to what extent gazelles are the drivers of the growth of industries and structural change. To this purpose we analyze gazelles over a 12 year period (annually from 1997 until 2008) in the Netherlands, and relate them to the dynamics in employment per industry. We use a panel vector autoregressive (PVAR) model to explore the relations between the presence of gazelles and industry (employment) growth (with 43 two digit industries). An increase in the presence of gazelles in an industry appears to have a positive effect on the subsequent growth of the industry. We do not find evidence foran inverse causal relation: there are no long run positive effects of increases in industry growth on the presence of gazelles. There is also no relation between the over-representation of gazelles and subsequent industry growth.
    Keywords: industrial organization ;
    Date: 2011
  8. By: J Paul Dunne (University of the West of England and University of Cape Town)
    Abstract: This paper makes a contribution to the debate on the economic effects of military spending using a large cross country panel data set for 1988-2006. As well as providing a relatively up to date analysis, sub groups are created that allow the analysis to focus on groups of countries at different income levels and Sub Saharan Africa (SSA), an area which has seen a large number of damaging conflicts. Estimating the empirical growth model suggested in Dunne et al (2005) gives results that show variation across the subgroups, with the general picture of significant negative short run effect and insignificant long run effect of military burden on per capita GDP growth, not consistent across the different income groups. In addition, breaking down the SSA group into those involved in conflict and those that are not, provides some further intriguing findings that suggest the value of further work on the impact of conflict on growth.
    Keywords: Military expenditure; economic growth; conflict; development
    JEL: O11 H56
    Date: 2011–04
  9. By: Moreno-Galbis, Eva
    Abstract: This paper seeks to gain insights on the relationship between growth and unemployment when considering heterogeneous agents in terms of skills. We allow for the possibility of training for unskilled employed workers and for the possibility of human capital depreciation for skilled unemployed workers. These features are introduced in an endogenous job destruction framework µa la Mortensen and Pissarides (1998). We show that, when growth accelerates, a larger share of unskilled workers gets trained, increasing the incentives of ¯rms to update the job-speci¯c technology, rather than destroying it. The positive impact of growth on the employment rate is then magni¯ed and the predicting ability of the model to reproduce the sensibility of employment with respect to growth too. When calibrated, the model manages to reproduce the aggregate capitalization e®ect estimated on the basis of OECD data. Fur- thermore, whereas for skilled and unskilled workers getting trained growth yields a reduction in the unemployment rates, for unskilled workers not getting trained growth fosters a rise in the unemployment rates.
    Keywords: TFP growth; Unemployment; Training, Human Capital Depreciation; Capitalization; Creative Destruction Effect
    JEL: J23 J24 O33
    Date: 2010–09
  10. By: Long Xin; Pelloni Alessandra
    Abstract: We consider the optimal factor income taxation in a standard R&D model with technical change represented by an increase in the variety of intermediate goods. Redistributing the tax burden from labour to capital will increase the employment rate in equilibrium. This has opposite effects on two distortions in the model, one due to monopoly power, the second to the incomplete appropriability of the bene?ts of inventions. Their relative momentum determines the sign of the welfare effect. We show that, for parameter values consistent with available estimates, taxing capital more heavily than labour can be welfare increasing.
    Keywords: Capital income taxes, R&D, growth effect, welfare Effect
    JEL: E62 H21 O41
    Date: 2011–03
  11. By: Roberto Tamborini
    Abstract: This paper examines the new SGP rules that should govern fiscal policies of the EMU member countries by means of dynamic models of the debt/GDP ratio. The focus is on factors of heterogeneity and interdependence in the three key variables that may affect the debt/GDP evolution in a multi-country setup like a monetary union: the real growth rate, the inflation rate and the nominal interest rate on the sovereign debt stock. These factors are almost ignored in the SGP intellectual and institutional framework, but they can jeopardize the main goal of fostering convergence and keeping debt/GDP ratios equalized and stable over time. Even the return of growth, inflation and interest rates to their pre-crisis tendential values, a not so likely and imminent event, will probably be insufficient to create a favourable environment for smooth debt/GDP convergence across EMU countries.
    Keywords: Stability and Growth Pact, Public debt management
    JEL: E6
    Date: 2011
  12. By: Spruk, Rok
    Abstract: Iceland experienced a significant financial meltdown and subsequent economic downturn after the 2008/2009 financial crisis struck the country. It had been the worst crisis ever experienced by a small country from the late 20th century onwards. Since 1980s, Iceland's macroeconomic stability had been constantly deteriorated by the most volatile annual CPI and asset-price inflation dynamics in the OECD. More than a decade of robust growth dynamics left behind an internationally over-exposed banking sector which exceeded the size of country's GDP by nearly 10 times. The failure of Lehman Brothers and a global credit crunch, in turn, raised CDS rates on Icelandic banks which immediately declared insolvency after the global interbank lending froze. The paper provides a comprehensive analysis of the macroeconomic, banking and financial background of the crisis. It also provides a short-term analysis of Iceland's macroeconomic outlook. The main findings of the article conclude that the depth of financial crisis is attributed to the recent decade of unadjusted monetary policy which failed to prevent sharp appreciation of the krona and thus created sufficient conditions for significant asset-price inflation, high interest rate differential and the largest banking collapse in small and open economies. As the size of the banking sector was several times the country's GDP, Icelandic central bank failed to act as a lender of the last resort. The paper concludes that, to prevent future crises of similar proportions, it is impossible for a small country to have a large international banking sector, its own currency and an independent monetary policy.
    Keywords: Iceland; Financial Crisis; Financial Macroeconomics; International Finance; Monetary Policy; Currency Crisis
    JEL: E62 E52 E44 E6 F31 G21
    Date: 2010–02–23
  13. By: Joseph W. Gruber; Filippo di Mauro; Bernd Schnatz; Nico Zorell
    Abstract: Global and U.S. trade declined dramatically in the wake of the global financial crisis in late 2008 and early 2009. The subsequent recovery in trade, while vigorous at first, gradually lost momentum in 2010. Against this backdrop, this paper explores the prospects for global and U.S. trade in the medium term. We develop a unified empirical framework – an error correction model – that exploits the cointegrating relationship between trade and economic activity. The model allows us to juxtapose several scenarios with different assumptions about the strength of GDP growth going forward and the relationship between trade and economic activity. Our analysis suggests that during the crisis both world trade and U.S. exports declined significantly more than would have been expected on the basis of historical relationships with economic activity. Moreover, this gap between actual and equilibrium trade is closing only slowly and could persist for some time to come.
    Date: 2011
  14. By: Chu, Angus C.; Lai, Ching-Chong; Liao, Chih-Hsing
    Abstract: How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D. Furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the growth and welfare effects of monetary policy in the AK model. Therefore, the market power of firms has drastically different implications on the welfare cost of inflation under the two growth engines (i.e., innovation versus capital accumulation). We also calibrate the two models using data in the US and the Euro Area to quantitatively evaluate and compare the welfare cost of inflation in the two economies. Finally, we simulate transition dynamics of the R&D model in order to compute the complete welfare changes from reducing inflation.
    Keywords: economic growth; inflation; monetary policy; patent policy; R&D
    JEL: O30 O40 E41
    Date: 2010–10

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.