nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒05‒14
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Estimates of the Steady State Growth Rates for Ireland By Casadio, Paolo; Paradiso, Antonio; Rao, B. Bhaskara
  2. Growth from International Capital Flows: The Role of Volatility Regimes By Ashoka Mody; Antu Panini Murshid
  3. Human Capital and Economic Growth: Time Series Evidence from Pakistan By Faisal Sultan Qadri, Faisal; Dr. Abdul Waheed, Waheed
  4. ‘Export Led Growth’ x ‘Growth Led Exports’: What Matters for the Brazilian Growth Experience after Trade Liberalization? By Araujo, Ricardo Azevedo; Soares, Cristiane
  5. Abatement Technology and the Environment-Growth Nexus with Education By Xavier Pautrel
  6. Economic Growth, Technological Progress, and Social Capital: The Inverted U Hypothesis By Angelo Antoci; Fabio Sabatini; Mauro Sodini
  7. Robust Growth Determinants. By Doppelhofer, Gernot; Weeks, Melvyn
  8. Foreign Direct Investment and Economic Growth in Pakistan: A Sectoral Analysis By Muhammad Arshad Khan; Shujaat Ali Khan
  9. FDI in the Service Sector – Propagator of Growth for India? By Sen, Chitrakalpa
  10. Beyond the crisis: Prospects for emerging Europe By Zsolt Darvas
  11. Failure to Launch? The Role of Land Inequality in Transition Delays By Andros Kourtellos; Ioanna Stylianou; Chih Ming Tan
  12. How Do Business and Financial Cycles Interact? By M. Ayhan Kose; Stijn Claessens; Marco Terrones
  13. Historical Evidence on the Finance-Trade-Growth Nexus By Michael D. Bordo; Peter L. Rousseau
  14. Sustainable growth in a model with dual-rate discounting By Kirill Borissov; Kirill Shakhnov

  1. By: Casadio, Paolo; Paradiso, Antonio; Rao, B. Bhaskara
    Abstract: This paper estimates the steady state growth rate for Ireland with an extended version of the Solow (1956) growth model. We show that the education and trade openness have played an important role to improve the long-run growth rate. Policies to further improve the long-run growth rate are suggested.
    Keywords: SSGR; Economic Growth; Trade Openness; Education; Ireland.
    JEL: C22 O52 O40
    Date: 2011–04–22
  2. By: Ashoka Mody; Antu Panini Murshid
    Abstract: Recent commentary has downplayed the growth dividend from international financial integration, highlighting the possibly negative correlation between capital inflows and long-run growth. This paper presents new evidence consistent with standard economic theory and a more benign interpretation of cross-border private capital flows. The key observation is that a country’s growth volatility changes over time. With volatility below a threshold, an inflow of foreign capital has promoted growth. However, during periods of volatile growth, more flows have been associated with slower growth. Volatility levels and changes reflect an interaction of domestic production and institutional structures with global factors.
    Keywords: Capital flows , Capital inflows , Current account surpluses , Developing countries , Development assistance , Economic growth , Economic models , Foreign investment ,
    Date: 2011–04–27
  3. By: Faisal Sultan Qadri, Faisal; Dr. Abdul Waheed, Waheed
    Abstract: Human capital is generally considered as a positive contributor in the economic growth. In this study, we estimate this relationship using time series data of Pakistan for the period 1978 to 2007. A health adjusted education indicator for human capital is used in the standard Cobb-Douglas production function confirms the long run positive relationship between human capital and the economic growth in Pakistan. A sensitivity analysis was also performed in order to check the robustness of the initial findings. The estimation results supported the findings of the previous studies that human capital is positively related to growth and also that the results are robust. The health adjusted education indicator was found to be a highly significant determinant of economic growth, which indicates that both the health and education sectors should be given special attention in order to ensure long run economic growth.
    Keywords: Human Capital; Economic Growth; Education and Health
    JEL: O47 E24 I18 I21
    Date: 2011
  4. By: Araujo, Ricardo Azevedo; Soares, Cristiane
    Abstract: In this paper we study the Brazilian growth experience after trade liberalization by testing both the Export Led Growth (ELG) and the Growth Led Exports (GLE) hypotheses through a causality test between exports and gross domestic output (GDP). The paper provides further evidence that after openness both ELG and GLE hypotheses are useful to explain the Brazilian growth experience.
    Keywords: Export led growth; Growth Led Exports; Thirlwall’s law; Granger causality test.
    JEL: O41 O24
    Date: 2011
  5. By: Xavier Pautrel (Université de Nantes, Laboratoire d’Économie et de Management de Nantes (LEMNA), Institut d’Économie et de Management de Nantes – IAE)
    Abstract: This article challenges the conventional result that a tighter environmental tax has no long-run effect on human capital accumulation in the presence of pollution arising from final output production. It demonstrates that the technology used in the abatement sector determines the existence and the direction of the growth-effect. A tighter environmental tax rises (respectively reduces) human capital accumulation in the presence of pollution arising from final production, if the abatement sector is relatively more intensive in human (resp. physical) capital than final sector. That result always holds for finite lifetime but for infinite lifetime it only holds when labor supply is endogenous. The transitional impact of a tighter environmental policy is also investigated.
    Keywords: Growth, Environment, Overlapping Generations, Human Capital, Abatement
    JEL: Q5 Q58
    Date: 2011–02
  6. By: Angelo Antoci; Fabio Sabatini; Mauro Sodini
    Abstract: We set up a theoretical framework to analyze the possible role of economic growth and technological progress in the erosion of social capital. Under certain parameters, the relationship between technological 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: Economic growth; social capital; social norms; technological progress.
    JEL: O33 Z13
    Date: 2011–04–07
  7. By: Doppelhofer, Gernot (Dept. of Economics, Norwegian School of Economics and Business Administration); Weeks, Melvyn (University of Cambridge)
    Abstract: This paper investigates the robustness of determinants of economic growth in the presence of model uncertainty, parameter heterogeneity and outliers. The robust model averaging approach introduced in the paper uses a flexible and parsi- monious mixture modeling that allows for fat-tailed errors compared to the normal benchmark case. Applying robust model averaging to growth determinants, the paper finds that eight out of eighteen variables found to be significantly related to economic growth by Sala-i-Martin et al. (2004) are sensitive to deviations from benchmark model averaging. For example, the GDP shares of mining or government consumption, are no longer robust or economically significant once deviations from the normal benchmark assumptions are allowed. The paper identifies outlying observations { most notably Botswana { in explaining economic growth in a cross-section of countries.
    Keywords: Determinants of Economic Growth; Robust Model Averaging; Heteroscedasticity; Outliers; Mixture models.
    JEL: C11 C21 C52 O47 O50
    Date: 2011–02–07
  8. By: Muhammad Arshad Khan (Pakistan Institute of Development Economics, Islamabad.); Shujaat Ali Khan (Middlebury College, USA.)
    Abstract: This paper establishes an empirical relationship between industry -specific foreign direct investment (FDI) and output under the framework of Granger causality and panel cointegration for Pakistan over the period 1981-2008. The result supports th e evidence of panel cointegration between FDI and output. FDI has a positive effect on output in the long run. The result also supports the evidence of long-run causality running from GDP to FDI, while in the short run, the evidence of two-way causality between FDI and GDP is identified. At the sectoral level, the effects of FDI on growth vary significantly across sectors. The most striking result obtained is that FDI causes growth in the primary and services sectors, while growth causes FDI in the manufacturing sector.
    Keywords: FDI, Growth, Cointegration, Causality
    JEL: F23 O40 C33
    Date: 2011
  9. By: Sen, Chitrakalpa
    Abstract: The last two decades have witnessed an unprecedented growth of the Indian service sector. This paper aims to analyze the growth dynamics. This study intends to see whether the growth in FDI has any significant impact on the service sector growth and also investigates whether a growth in this sector causes the GDP to grow. The results suggest that there has been a significant positive impact of the FDI on services sector and this service sector growth has in turn a significant effect on the GDP. The study also looks into the sub-sectoral dynamics and indicates towards the fact that the trade, hotels and restaurants, transport, storage and communications sub-sector contributes the most in the growth of Indian service sector. Therefore FDI can be truly be used as a propagator of economic growth, via its favourable effect on the growth in the services sector. Finally, the study addresses the long running sustainability debate regarding the Indian service sector.
    Keywords: Service sector; FDI; Economic growth
    JEL: F21 F43 C1
    Date: 2011–04–18
  10. By: Zsolt Darvas
    Abstract: This Policy Contribution by Zsolt Darvas assesses the impact of the 2008-09 global financial and economic crisis on the medium-term growth prospects of CEES countries, the Caucasus and Central Asia, which starting their economic transition about twenty years ago. Evidence shows that the crisis has had a major impact on the within-sample fit of the models used and that the positive impact of EU enlargement on growth is smaller than previous research has shown. The crisis has also altered the future growth prospects of the countries studied, even in the optimistic but unrealistic case of a return to pre-crisis capital inflows and credit booms.
    Date: 2011–01
  11. By: Andros Kourtellos; Ioanna Stylianou; Chih Ming Tan
    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.
    Date: 2011–05
  12. By: M. Ayhan Kose; Stijn Claessens; Marco Terrones
    Abstract: This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.
    Keywords: Business cycles , Economic models , Economic recession , Economic recovery , Financial sector , Fiscal policy , Monetary policy ,
    Date: 2011–04–20
  13. By: Michael D. Bordo; Peter L. Rousseau
    Abstract: We study linkages between financial development, international trade, and long-run growth using data since 1880 for seventeen now-developed “Atlantic” economies and a set of cross-country and dynamic panel data models. We find that finance and trade reinforced each other before 1930, but that these effects did not persist after the Second World War. Financial development has positive effects on growth throughout the sample period, while trade affects growth strongly and independently after 1945. We attribute the rising importance of trade in explaining growth to major post-World War II changes in tariffs and quantity restrictions associated with the GATT, the establishment of the European Common Market, and the gradual elimination of capital controls after 1973. The findings are robust to the use of ‘deep’ fundamentals such as legal origin and indicators of the political environment as instruments for financial development and trade. Financial development, however, is more closely linked to these fundamentals than trade.
    JEL: E44 F14 F15 N1 N2
    Date: 2011–05
  14. By: Kirill Borissov; Kirill Shakhnov (Department of Economics, European University Institute)
    Abstract: In an important model of growth and pollution proposed by Stokey [Int. Econ. Rev. 39 (1998) 1] neither the rate of economic growth nor the rate of growth of emissions depends on the time preference of the representative agent, which seems somewhat paradoxical. To resolve this paradox, we introduce into Stokey's model the assumption of dual-rate discounting, prove the existence of a sustainable balanced growth optimal path, and show that the growth rates of output and emissions are increasing in the proportion between the consumption and the environmental discount factors of the representative agent.
    Keywords: growth, pollution, discounting
    JEL: C61
    Date: 2011–03–07

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