nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒05‒24
eighteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Does defence spending impede economic growth? cointegration and causality analysis for Pakistan By Shahbaz, Muhammad; Afza, Talat; Shabbir, Shahbaz Muhammad
  2. Does Defence Spending Stimulate Economic Growth in India? By Tiwari, Aviral; Shahbaz, Muhammad
  3. Population growth and endogenous technological change: Australian economic growth in the long run By Banerjee, Rajabrata
  4. Economic Growth in the Philippines: A Spatial Econometrics Analysis at the Provincial Level, 1991 â 2000. By Pede, Valerien O.; Huelgas, Zenaida; Villano, Lorena; Garcia, Cornelia; Mckinley, Justin D.; Mohanty, Samarendu
  5. The US-UK productivity gap in the twentieth century: a race between technology and population By Banerjee, Rajabrata
  6. Assessing the effect of current account and currency crises on economic growth By Aßmann, Christian
  7. Estimates of Total Factor Productivity, the Contribution of ICT, and Resource Reallocation Effects in Japan and Korea By Kyoji Fukao; Tsutomu Miyagawa; Hak K. Pyo; Keun Hee Rhee
  8. Analysis of the relationship between economic growth and unemployment By ¼ubica Slušná
  9. A Model of Technology Transfer in Japan's Rapid Economic Growth Period By Aoki, Shuhei
  10. Explaining the (non-) causality between energy and economic growth in the U.S. - A multivariate sectoral analysis By Christian Gross
  11. Human capital and its effect on the farm business life cycle By Hadrich, Joleen C.
  12. The Diamond-Rajan Bank Runs in a Production Economy By Kobayashi, Keiichiro
  13. Antitrust Law and the Promotion of Democracy and Economic Growth By Niels Petersen
  14. The Economic Growth Impacts of Sugarcane Expansion In Brazil: An Inter-Regional Analysis By Deuss, Annelies
  15. Balance of Payments Constrained Growth Models: History and Overview By A. P. Thirlwall
  16. Multinationals as Stabilizers? Economic Crisis, Access to Finance, and Employment Growth By Roberto Alvarez; Holger Görg
  17. As Innovations Drive Economic Growth, Do they also Raise Well-Being? By Martin Binder; Ulrich Witt
  18. Monetary Policy and Stock Market Booms By Christiano, Lawrence; Ilut, Cosmin; Motto, Roberto; Rostagno, Massimo

  1. By: Shahbaz, Muhammad; Afza, Talat; Shabbir, Shahbaz Muhammad
    Abstract: This study revisits the relationship between defence spending and economic growth using Keynesian model in Pakistan by applying ARDL bounds testing approach to cointegration for long run and error correction method for short span of time. Empirical evidence suggests a stable cointegration relationship between defence spending and economic growth. An increase in defence spending retards the pace of economic growth confirming the validation of Keynesian hypothesis in the country. Current economic growth is positively linked with economic growth in previous period while rise in nonmilitary expenditures boosts economic growth. Interest rate is inversely associated with economic growth. Finally, unidirectional causality running from military spending to economic growth is found.
    Keywords: Defence Spending; Economic Growth; Cointegration; Causality; Pakistan
    JEL: B22
    Date: 2011–01–26
  2. By: Tiwari, Aviral; Shahbaz, Muhammad
    Abstract: The aim of present is to reinvestigate the effect of defence spending on economic growth using Zivot and Andrews (1992) and Lee and Strazicich, (2003) structural unit root tests and ARDL bounds testing approach to cointegration in augmented version of Keynesian model for Indian economy. Our analysis confirmed long run relationship between the variables and, results indicated positive effect of defence spending on economic growth (also negative impact after a threshold point). Investment and trade openness stimulate economic growth while economic growth is inversely affected by interest rate. Granger causality analysis showed bidirectional causal relationship between defence spending and economic growth as probed by variance decomposition approach.
    Keywords: Defence Spending; Economic Growth; Cointegration
    JEL: B22
    Date: 2011–01–03
  3. By: Banerjee, Rajabrata
    Abstract: The Australian growth experience appears to be a three-act phenomenon, with higher per capita income and living standards before 1890 and after 1940, disconnected by a 50-year period of no trend improvement in between. This paper examines the roles of technological progress and population growth in Australian productivity growth over the past two centuries. The empirical results confirm that while population growth had a negative effect, innovative activity had a positive effect on productivity growth. Furthermore, the estimates strongly support the Schumpeterian growth hypothesis, which predicts that productivity growth is driven by the levels of research intensity in the economy.
    Keywords: endogenous growth; technological progress; population
    JEL: O4 O3
    Date: 2011–03
  4. By: Pede, Valerien O.; Huelgas, Zenaida; Villano, Lorena; Garcia, Cornelia; Mckinley, Justin D.; Mohanty, Samarendu
    Abstract: Investigating the determinants of economic growth remains a long research tradition in the economic growth literature. Most studies in this literature have tried to link economic growth and different economic factors using either neoclassical growth theories or endogenous growth approaches. These studies apply these growth theories to identify the factors responsible for the observed differences/disparities between regions or countries. While early studies focused on cross-country analyses, the recent most studies consider regions or sub-national entities as unit of analysis. This has raised the question of whether theories developed for cross-country analysis could be automatically applied for regional or sub-national analysis. Given the profound difference between nations and regions in terms of degree of openness, theories developed in cross-country analysis may not be automatically applied in regional analysis (see Mangrini, 2004). However, properly accounting for the spatial interaction effects may provide a way to use these theories in regional analysis. Regional analysis of economic growth has therefore spurned the development of specialized quantitative methods designed to account for the spatial dimensions of higher resolution, spatially referenced data. The goal of this research is to investigate the process of regional economic growth in the Philippines focusing on provincial data. Previous studies on regional growth within the Philippines have analyzed the regional growth process following neoclassical growth models or endogenous growth models without explicitly modeling spatial dependence between regions and the role of spillover effects. Traditional growth regressions with ordinary least squares may yield biased or inconsistent estimates if spatial autocorrelation is present but have been accounted for. This paper uses spatial econometrics techniques to estimate three theoretical growth models: the unconditional growth model, the Solow model and the Mankiw Romer and Weil model. Investment and human capital were found to be the main drivers of economic growth.
    Keywords: Community/Rural/Urban Development, Research and Development/Tech Change/Emerging Technologies, Research Methods/ Statistical Methods,
    Date: 2011
  5. By: Banerjee, Rajabrata
    Abstract: Recent developments in endogenous growth models have enabled researchers to reconsider some key events such as the take-off of the United States in the twentieth century. This paper investigates the roles played by innovative activity and population growth on comparative total factor productivity (TFP) growth between the US and the UK in the period 1870–2009. The study finds that the comparative lead in the US TFP was a race between innovative activity on the one hand and population growth on the other. While the first factor influenced TFP growth positively, the latter created a growth drag. Moreover, the findings strongly support the Schumpeterian hypothesis, where innovative activity has permanent growth effects in the long run.
    Keywords: endogenous growth; productivity gap; technology; population
    JEL: O30 O40
    Date: 2011–05–12
  6. By: Aßmann, Christian
    Abstract: Several empirical studies are concerned with measuring the effect of currency and current account crises on economic growth. Using different empirical models this paper serves two aspects. It provides an explicit assessment of country specific factors influencing the costs of crises in terms of economic growth and controls via a treatment type model for possible sample selection governing the occurrence of crises in order to estimate the impact on economic growth correctly. The applied empirical models allow for rich intertemporal dependencies via serially correlated errors and capture latent country specific heterogeneity via random coefficients. For accurate estimation of the treatment type model a simulated maximum likelihood approach employing efficient importance sampling is used. The results reveal significant costs in terms of economic growth for both crises. Costs for reversals are linked to country specific variables, while costs for currency crises are not. Furthermore, shocks explaining current account reversals and growth show strong significant positive correlation. --
    Keywords: Currency crises,Current account reversals,Treatment Model,Discrete dependent variable,Efficient Importance Sampling,Panel Data
    JEL: F32 C15 C23 C33 O10
    Date: 2011
  7. By: Kyoji Fukao; Tsutomu Miyagawa; Hak K. Pyo; Keun Hee Rhee
    Abstract: The purpose of our study is to identify the sources of economic growth based on a KLEMS model for Japan and Korea. We also identify the growth contribution of ICT assets and resource reallocation effects in the two economies. Both Japan and Korea enjoyed high TFP growth in ICT-producing sectors but suffered low TFP growth in ICT-using sectors. For Japan, we find that the main factor underlying the Lost Decade is the slow-down in TFP growth. We also found that Korea's TFP growth was slow until the Asian financial crisis of 1997-1999 but then accelerated after the crisis. It seems that before the crisis, Korea was following a catch-up process with developed economies that was predominantly input-led and manufacturing-based, as documented by Timmer (1999) and Pyo (2001). However, through the drastic economic reform undertaken during the crisis, Korea seems to have shifted to a new phase of economic growth since the end of the 1990s. TFP growth rates, especially those in manufacturing sectors, have substantially increased in post-crisis Korea. Both in Japan and Korea, productivity in service sectors is much lower than in manufacturing. The reason probably is excessive regulation and a lack of competition in service sectors. And these factors seem to have impeded introduction of ICT in service industries. As for ICT capital accumulation, the ICT investment/GDP ratio of Korea is higher than that of Japan. Especially, the speed of ICT accumulation in the ICT sector in Korea is much faster than that in Japan. Both in Japan and Korea, the largest component in ICT investment is computing equipment. In the case of resource reallocation across sectors, the reallocation effect of capital input was negligible or negative for most periods both in Korea and Japan. After the financial crisis of 1997-99, the resource allocation effect of capital in Korea remained negative, although the size of the negative effect declined. On the other hand, the reallocation effect of labor input was positive for most periods both in Korea and Japan.
    Date: 2011–03
  8. By: ¼ubica Slušná (University of Economics in Bratislava, Faculty of National Economy, Department of Economic Theory)
    Abstract: In the study we deal with two key indicators of economic development, which are economic growth and unemployment. We focus on their theoretical and practical aspects. We analyze their relationship and focus on its development in SR. The main part of the study is evaluation of the relationship between economic growth and unemployment on the basis of Okun’s law in the SR and comparison of these results with other members of EU. The last chapter contains prognosis of unemployment rate development, created on the basis of the equation derived from Okun’s law for SR.
    Keywords: Economic growth, Unemployment, Okun’s law, Correlation, Gross domestic product, Labour productivity
    JEL: J64
    Date: 2011–05–10
  9. By: Aoki, Shuhei
    Abstract: Why did the Japanese economy stagnate beforeWorldWar II, how did it achieve rapid economic growth after the war, and why did it stagnate again after the 1970s? To answer these questions, I developed a two-country trade model with technology transfer, where firms in a developed country (the U.S.) transfer technology to the competitors in a developing country (Japan) if it is profitable to do so and where the technology transfer is the engine of economic growth. In this model, among multiple equilibria, the equilibrium with low labor cost in Japan was chosen during the rapid growth period. Then, the firms in the developed country transferred technology to the firms in the developing country, resulting in rapid growth. However, during the other periods, the equilibrium with high labor cost in Japan was chosen, which caused stagnation. The model is quantitatively consistent with the per capita GDP relative to the U.S., the purchasing power parity-exchange rate ratio, and to some degree, the swings in labor share of postwar Japan.
    Keywords: Japan's rapid economic growth, Licensing, Technology transfer, Undervaluation of yen
    JEL: F43 O11 O41
    Date: 2011–04
  10. By: Christian Gross
    Abstract: The rapidly growing literature on the relationship between energy consumption and economic growth has not univocally identified the ‘real’ causal relationship yet. We argue that bivariate models, which analyze the causality at the level of the total economy, are not appropriate – especially in cases where both variables do not cover the same scope of economic activity. After discussing appropriate pairs of variables, we investigate Granger causality between energy consumption and GDP in the U.S. for the period from 1970 to 2007 for three sectors - industry, commercial sector, transport as well as for the total economy. The choice of additional variables is based on major findings from the Environmental Kuznets curve literature and its critical reflections. Using the recently developed ARDL bounds testing approach by Pesaran and Shin (1999) and Pesaran et al. (2001), we find evidence for long-run Granger causality for the commercial sector, in case energy is the dependent variable, as well as bi-directional long-run Granger causality for the transport sector. We conclude that controlling for trade as well as increasing energy productivity significantly improves the fit of several extensions of the bivariate model.
    Keywords: energy, growth, multivariate ARDL, cointegration, granger causality Length 30 pages
    JEL: C3 Q4
    Date: 2011–05
  11. By: Hadrich, Joleen C.
    Abstract: Human capital has been identified as significant determinant of farm size growth. However, there are numerous measures for human capital. Traditional measures include age, experience, and education of the principal operator and a management measure. This study identifies three types of management capabilities: production, financial, and human resource, as human capital measures. Farm size growth is estimated over a 15 year time period, 1994-2009. Results indicate that age of principal operator, financial management, and human resource management are significant determinants of farm size growth.
    Keywords: human capital, farm life cycle, farm growth, Agricultural Finance, Farm Management, Labor and Human Capital,
    Date: 2011
  12. By: Kobayashi, Keiichiro
    Abstract: To analyze the macroeconomic consequences of a systemic bank run, we integrate the banking model `a la Diamond and Rajan (2001a) into a simplified version of an infinite-horizon neoclassical growth model. The banking sector intermediates the collateral-secured loans from households to entrepreneurs. The entrepreneurs also deposit their working capital in the banks. The systemic bank run, which is a sunspot phenomenon in this model, results in a deep recession through causing a sudden shortage of the working capital. We show that an increase in the probability of occurrence of the systemic run can persistently lower output, consumption, labor, capital and the asset price, even if the systemic run does not actually occur. This result implies that the slowdown of economic growth after the financial crises may be caused by the increased fragility of the banking system or the raised fears of recurrence of the systemic runs.
    Date: 2011–03
  13. By: Niels Petersen (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: There is a considerable debate in the legal literature about the purpose of antitrust institutions. Some argue that antitrust law merely serves the purpose of economic growth, while others have a broader perspective on the function of antitrust, maintaining that the prevention of economic concentration is an important means to promote democratization and democratic stability. This contribution seeks to test the empirical assumptions of this normative debate. Using panel data of 154 states from 1960 to 2007, it analyzes whether antitrust law actually has a positive effect on democracy and economic growth. The paper finds that antitrust law has a strongly positive effect on the level of GDP per capita and economic growth. However, there is no significant positive effect on the level of democracy. It is suggested that these results might be due to the current structure of existing antitrust laws, which are designed to promote economic efficiency rather than to prevent economic concentration.
    Date: 2011–01
  14. By: Deuss, Annelies
    Keywords: Brazil, sugarcane expansion, economic growth, propensity score, ethanol, Agricultural and Food Policy, Crop Production/Industries, International Development, Research Methods/ Statistical Methods, C14, C21, O13, R13,
    Date: 2011
  15. By: A. P. Thirlwall
    Abstract: This paper surveys balance of payments constrained growth models from Thirlwall’s original contribution in 1979 to the latest tests of the model using cointegration techniques. Historical antecedents of the model are explored (e.g. the Harrod trade multiplier; dual gap analysis; Prebisch’s centre-periphery model), and various extensions of the model are outlined including: capital flows; interest payments on debt, and generalisation of the model to include many countries and many goods. All the empirical literature, using time series, panel and cross section data, is documented with discussion of the tests employed. The basic model that long run GDP growth can be approximated by the ratio of export growth to the income elasticity of demand for imports is remarkably robust. The relevance of the model is shown for the current discussion of global imbalances in the world economy.
    Keywords: Balance of Payments Constrained Growth; Harrod Trade Multiplier; North-South Models; Global Imbalances
    JEL: F02 F32 F43
    Date: 2011–05
  16. By: Roberto Alvarez; Holger Görg
    Abstract: This paper examines the comparative response of multinationals and domestic firms to an economic crisis, using the empirical setting of a well defined case of economic slowdown in Chile. We find that employment in manufacturing plants has been drastically reduced during the economic crisis. Our findings reveal that multinationals are more likely to exit contributing to the employment contraction during the crisis, but surviving foreign firms experience lower employment reductions than domestic enterprises. These results are not fully consistent with idea that multinationals are less affected by an economic crisis and that they may be able to act as stabilizers
    Keywords: Multinationals, employment growth, plant survival, economic crisis
    JEL: F2 O1 J2
    Date: 2011–05
  17. By: Martin Binder; Ulrich Witt
    Abstract: While there is little doubt that innovations drive economic growth, their effects on well-being are less clear. One reason for this are ambivalent effects of innovations on well-being that result from pecuniary and technological externalities of innovations, argued to be inevitably. Another major reason lies in the fact that, as a result of innovations, preferences can change over time. Under such conditions, a time-consistent measuring rod for changes in well-being is hard to construct. Existing conceptions of well-being are shown not yet to solve the problem in a way that provides an unambiguous answer to the question in the title.
    Keywords: innovations, growth, welfare, well-being, preference change Length 20 pages
    JEL: D63 I31 O00
    Date: 2011–05
  18. By: Christiano, Lawrence (Northwestern University; National Bureau of Economic Research); Ilut, Cosmin (Duke University); Motto, Roberto (European Central Bank); Rostagno, Massimo (European Central Bank)
    Abstract: Historical data and model simulations support the following conclusion. Inflation is low during stock market booms, so that an interest rate rule that is too narrowly focused on inflation destabilizes asset markets and the broader economy. Adjustments to the interest rate rule can remove this source of welfare-reducing instability. For example, allowing an independent role for credit growth (beyond its role in constructing the inflation forecast) would reduce the volatility of output and asset prices.
    Keywords: inflation targeting, sticky prices, sticky wages, stock price boom, DSGE model, New Keynesian model, news, interest rate rule
    JEL: E42 E58
    Date: 2011–03

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