nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒04‒30
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Social Status, Human Capital Formation and the Long-run Effects of Money By Chen, Hung-Ju
  2. Democratization, Violent Social Conflicts, and Growth By Matteo Cervellati; Sunde, Uwe
  3. Inflation variability and the relationship between inflation and growth By Raghbendra Jha; Tu Dang
  4. Economic Growth, Technical Progress, and Social Capital: the Inverted U Hypothesis By Antoci, Angelo; Sabatini, Fabio; Sodini, Mauro
  5. Heterogeneous Human Capital, Trade and Growth By Cheng-Te Lee; Deng-Shing Huang
  6. Public Policy, State Business Climates, and Economic Growth By Jed Kolko; David Neumark; Marisol Cuellar Mejia
  7. The growth of two small economies in the Great Depression: GDP estimation for Cyprus and Malta during the interwar period (1921-1938) By Apostolides, Alexander
  8. Aid and Growth What Meta-Analysis Reveals By Tseday Jemaneh Mekasha; Finn Tarp
  9. Failure to Launch? The Role of Land Inequality in Transition Delays By Andros Kourtellos; Ioanna Stylianou; Chih Ming Tan

  1. By: Chen, Hung-Ju
    Abstract: This study examines the effects of monetary policy in a two-sector cash-in-advance economy of human capital accumulation. Agents concern about their social status represented by the relative physical capital and relative human capital. We find that if the desire for social status depends only on relative physical capital, money is superneutral in the growth-rate sense. However, if the desire for social status depends on relative human capital, the money growth rate will have a positive effect on the long-run economic growth rate. Furthermore, an increase in the desire to pursue human capital will raise the long-run growth rate, but an increase in the desire to pursue physical capital will lower it.
    Keywords: Cash-in-advance economy; Endogenous growth; Social status.
    JEL: O42 E52 C62
    Date: 2011
  2. By: Matteo Cervellati; Sunde, Uwe
    Abstract: This paper investigates the empirical role of violent conflicts for the causal effect of democracy on economic growth. Exploiting within-country variation to identify the effect of democratization during the "Third Wave", we find evidence that the effect of democratization is weaker than reported previously once one accounts for the incidence of conflict, while the incidence of conflict itself significantly reduces growth. The results show in turn that permanent democratic transitions significantly reduce the incidence and onset of conflict, which suggests that part of the positive growth effect of democratization arises because democratization reduces conflict incidence. When accounting for the role of violence during democratization, we find evidence that peaceful transitions to democracy have a significant positive effect on growth that is even larger than reported in the previous literature, while violent transitions to democracy have no, or even negative, effects on economic growth.
    Keywords: Democratization, Armed Conict, Civil War, Economic Growth, Democratization Scenario, Peaceful Transition.
    JEL: O43 N10 N40
    Date: 2011–04
  3. By: Raghbendra Jha; Tu Dang
    Abstract: We examine the effect of inflation variability and economic growth using annual historical data on both developing and developed countries. The data cover 182 developing countries and 31 developed countries for the period 1961-2009. Proxying inflation variability by the five-year coefficient of variation of inflation, we obtain the following results: (1) For developing countries, there is significant evidence to suggest that when the rate of inflation exceeds 10 % inflation variability has a negative effect on economic growth. (2) For developed countries, there is no significant evidence that inflation variability is detrimental to growth.
    JEL: C51 E31 E58 O40
    Date: 2011–04
  4. By: Antoci, Angelo; Sabatini, Fabio; Sodini, Mauro
    Abstract: We set up a theoretical framework to analyze the possible role of economic growth and technical progress in the erosion of social capital. Under certain parameters, the relationship between technical progress and social capital can take the shape of an inverted U curve. We show the circumstances allowing the economy to follow trajectories where the stock of social capital grows endogenously and unboundedly.
    Keywords: Social capital; technological progress; economic growth; social interactions
    JEL: O11 J22 O33 Z13 O12
    Date: 2011–04–15
  5. By: Cheng-Te Lee (Department of International Trade, Chinese Culture University, Taiwan); Deng-Shing Huang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Distribution differences in human capital matter for a country’s growth and trade. While the existing literature considers only the diversity difference in talent distribution, we argue that the kurtosis difference is also an important factor. In a two-sector equilibrium growth model, where the production function is supermodular for the consumption-good sector and submodular for the R&D sector, we prove that the diversity effect and kurtosis effect are opposite to each other. A country endowed with more diverse but leptokurtic talent distribution may have lower growth rate and import submodular goods, opposite to the conventional result from considering only the diversity difference.
    Keywords: diversity, kurtosis, growth, trade
    JEL: F11 O41
    Date: 2011–04
  6. By: Jed Kolko; David Neumark; Marisol Cuellar Mejia
    Abstract: State business climate indexes are a popular means of summarizing the “bundles” of state policies that might affect state economic growth. But the rankings of states’ business climates vary wildly, raising questions about what these business climate indexes measure, and hence about which policies they capture are more important determinants of state economic growth. Business climate rankings tend to focus on policies related either to productivity, or to taxes and other costs of doing business. States that rank poorly along one of these dimensions often rank quite highly on the other. Business climate indexes that focus on productivity-related variables have essentially no predictive power for economic growth. In contrast, business climate indexes focusing on taxes and costs predict growth of employment, wages, and Gross State Product. Looking at sub-indexes that disaggregate the policies captured by the taxes-and-cost related indexes, two types of policies are associated with faster economic growth: less spending on welfare and transfer payments; and a more uniform and simpler corporate tax structure. But factors beyond the control of policy, like a state’s industry mix, population density, and weather, have a stronger relationship with economic growth than even the tax-and-cost-focused business climate indexes.
    JEL: H2 H5 J21 O4
    Date: 2011–04
  7. By: Apostolides, Alexander
    Abstract: This article presents the major results of the first attempt to create historical national accounts for Cyprus and Malta. It constructs the first detailed estimates of output at aggregate and sector levels, enabling the analysis of economic growth and tracing structural change. The islands’ performance is evaluated within the context of wider economic change in Europe’s South Eastern periphery, suggesting that their economic growth was slow in comparison, despite both Cyprus and Malta being far less exposed to the political upheavals of the First World War. However, the ultimate reasons for their comparatively weak growth performance differed: Cyprus experienced a prolonged agricultural crisis, but participated in the post-depression recovery through the rapid expansion of the copper mining industry. Malta’s growth was slower than Cyprus due to the combination of declining British military expenditure and accelerated demographic growth. These differences notwithstanding, the islands were ultimately affected by common problems. Their small overall size had a negative effect on their performance as global protectionism increased and restricted export opportunities. An important negative determinant for growth during the interwar period was their size, which in combination with the islands’ status as British colonies, made autarkic policies prohibitive.
    Keywords: Economic History; Colonial Development; GDP estimation; Sectoral Disaggregation ; Small Economies
    JEL: O47 C82 N14
    Date: 2011–04–13
  8. By: Tseday Jemaneh Mekasha; Finn Tarp
    Abstract: Some recent literature in the meta-analysis category where results from a range of studies are brought together throws doubt on the ability of foreign aid to foster economic growth and development. This paper assesses what meta-analysis has to say about the effectiveness of foreign aid in terms of the growth impact. We re-examine key hypotheses, and find that the effect of aid on growth is positive and statistically significant. This significant effect is genuine, and not an artefact of publication selection. We also show why our results differ from those published elsewhere.
    Keywords: aid and growth, meta-analysis, heterogeneity and publication bias
    Date: 2011
  9. By: Andros Kourtellos (Department of Economics, University of Cyprus; The Rimini Centre for Economic Analysis (RCEA)); Ioanna Stylianou (Department of Economics, University of Cyprus); Chih Ming Tan (Department of Economics, Clark University; The Rimini Centre for Economic Analysis (RCEA))
    Abstract: Recent work in the growth literature has provided various explanations for transition delays and the great divergence. This paper provides empirical support for one theory of transition delays: initial land inequality. Our analysis is designed to elucidate the channels via which land inequality can affect long-run economic performance. Using a new historical data set for land inequality (Frankema (2009)) we employ duration analysis to investigate whether higher levels of land inequality lead to longer delays in the extension of primary schooling. We then investigate whether such delays affect long-run economic performance via their effect on contemporaneous schooling. Our findings suggest that land inequality is a key determinant of delays in schooling, and that such delays have a significant negative impact on long-run output.
    Keywords: growth takeoffs; schooling; duration analysis; model uncertainty; institutions
    JEL: C59 O40 Z12
    Date: 2011–04

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