nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒06‒18
eleven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. The Underground Economy in a Matching Model of Endogenous Growth By Lisi, Gaetano; Pugno, Maurizio
  2. Intergenerational complementarities in education, endogenous public policy, and the relation between growth and volatility By Palivos, Theodore; Varvarigos, Dimitrios
  3. Exports and Italy’s economic development: a long-run perspective (1863-2004) By Barbara Pistoresi; Alberto Rinaldi
  4. Ageing, Government Budgets, Retirement, and Growth By Dirk Niepelt; Martín Gonzalez-Eiras
  5. Economic Growth in Cities: Issues for Central Government By Henry G. Overman
  6. Paradigm shift? A critique of the IMF’s new approach to capital controls By Daniela Gabor
  7. Has the Financial Crisis eroded Citizens’ Trust in the European Central Bank? - Evidence from 1999-2010 By Felix Roth; Daniel Gros; Felicitas Nowak-Lehmann
  8. Causality between FDI and Financial Market Development: Evidence from Emerging Markets By Soumaré, Issouf; TCHANA TCHANA, Fulbert
  9. Fractals and Self-Similarity in Economics: the Case of a Stochastic Two-Sector Growth Model By La Torre, Davide; Marsiglio, Simone; Privileggi, Fabio
  10. Revisiting the optimal population size problem under endogenous growth: minimal utility level and finite lives By Raouf Boucekkine; Giorgio Fabbri; Fausto Gozzi
  11. An empirical estimation of Balassa – Samuelson Effect in case of Eastern European Countries By Paun, Cristian

  1. By: Lisi, Gaetano; Pugno, Maurizio
    Abstract: A matching model will explain both unemployment and economic growth by considering the underground sector. Three problems can thus be simultaneously accounted for: (i) the persistence of underground economy, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. Key assumptions are that entrepreneurial ability is heterogeneous, skill accumulation determines productivity growth, job-seekers choose whether to invest in education. The conclusions are that the least able entrepreneurs set up underground firms, employ unskilled labour, and do not contribute to growth. Underground employment alleviates unemployment only if the monitoring rate is sufficiently low.
    Keywords: underground economy; entrepreneurship; growth; unemployment; matching models
    JEL: J6 J24 E26 L26
    Date: 2011–06–07
  2. By: Palivos, Theodore; Varvarigos, Dimitrios
    Abstract: We construct an overlapping generations model in which parents vote on the tax rate that determines publicly provided education and offspring choose their effort in learning activities. The technology governing the accumulation of human capital allows these decisions to be strategic complements. In the presence of coordination failure, indeterminacy and, possibly, growth volatility emerge. This indeterminacy can be eliminated by an institutional mechanism that commits to a minimum level of public education provision. Given that, in the latter case, the economy moves along a uniquely determined balanced growth path, we argue that such structural differences can account for the negative correlation between volatility and growth.
    Keywords: Human Capital; Intergenerational Complementarities; Economic Growth; Endogenous Taxation; Volatility
    JEL: H42 O41 H52
    Date: 2011–04–16
  3. By: Barbara Pistoresi; Alberto Rinaldi
    Abstract: This paper investigates the relationship between real export and real GDP in Italy from 1863 to 2004 by using cointegration analysis and causality tests. The outcome suggests that these variables comove in the long run but the direction of causality depends on the level of economic development: in the period prior to WW1 the growth of the Italian economy led that of exports, while in the post-WW2 period the causal relationship was reversed with the expansion of exports that determined the growth of the Italian economy
    Keywords: Export led growth hypothesis, unit root tests, cointegration analysis, Granger – causality
    JEL: F43 O11 N1 N7
    Date: 2011–05
  4. By: Dirk Niepelt (Study Center Gerzensee, University of Bern, IIES Stockholm University); Martín Gonzalez-Eiras (Universidad de San Andrés)
    Abstract: We analyze the short and long run effects of demographic ageing—increased longevity and reduced fertility—on per-capita growth. The OLG model captures direct effects, working through adjustments in the savings rate, labor supply, and capital deepening, and indirect effects, working through changes of taxes, government spending components and the retirement age in politico-economic equilibrium. Growth is driven by capital accumulation and productivity increases fueled by public investment. The closed-form solutions of the model predict taxation and the retirement age in OECD economies to increase in response to demographic ageing and per-capita growth to accelerate. If the retirement age were held constant, the growth rate in politico-economic equilibrium would essentially remain unchanged, due to a surge of social security transfers and crowding out of public investment.
    Date: 2011–06
  5. By: Henry G. Overman
    Abstract: This note is concerned with the role of cities and urban policy in growth. Decentralisation from central to local government may help city leaders raise economic performance. It also generates new policy choices for central government - especially in policy areas where local leaders are unwilling or unable to take actions that benefit growth. Policy decisions in this area will also impact on geographical concentrations of firms that are located outside cities.
    Date: 2011–06
  6. By: Daniela Gabor (University of the West of England)
    Abstract: The global financial crisis forcefully highlighted the importance of developing mechanisms to curb the effects of large and volatile capital inflows on growth and financial stability in developing countries. It led the IMF to reconsider its long-standing rejection of capital controls. This paper explores the analytical framework underlying the IMF’s new position, arguing that its sequencing strategy offers a formulaic solution that neglects the institutional make-up of money and currency markets, is asymmetric in its emphasis on the upturn of the liquidity cycle and sanctions capital-controls only as a last-resort solution. The new approach can have perverse impacts, increasing vulnerability where banks play an important role in the intermediation of capital inflows. The paper offers alternative policy solutions that focus on realigning bank incentives towards longer horizons and sustainable growth models, combining carefully designed central bank liquidity strategies and institutional changes in the banking sector.
    Keywords: IMF, capital controls, financial crisis, global liquidity, shadow banks, sterilizations, central banks.
    JEL: E58 E63 F3 G1 O11 O2
    Date: 2011–06
  7. By: Felix Roth; Daniel Gros; Felicitas Nowak-Lehmann
    Abstract: Trust in the ECB has fallen to unprecedented lows in the aftermath of the financial crisis. Up to the start of the recession in 2008, trust levels in the ECB were moderately high and trust in the ECB was not affected by business cycle variables such as growth and inflation. This changed radically with the recession, with trust in the ECB becoming correlated quite closely with growth. After a relatively short recovery in 2009 trust in the ECB has fallen again at the start of the Eurozone crisis. Our findings first imply that European citizens seem to have placed a heavy share of the blame on the European Central Bank for the real economic downturn caused by the financial crisis in early 2009 and secondly an increase of debt over GDP and inflation have caused the new fall in May 2010.
    Keywords: Trust, financial crisis, European Central Bank
    JEL: E58 G21 Z13
    Date: 2011–05–20
  8. By: Soumaré, Issouf; TCHANA TCHANA, Fulbert
    Abstract: This paper studies the causal relationship between foreign direct investment (FDI) and financial market development (FMD) using panel data from emerging markets. Most studies of the relationship between FDI and FMD have focused on the role of FMD in the link between FDI and economic growth, with no deep understanding of direct causality between FDI and FMD, especially in emerging markets, where financial markets are in the development stage. We document bidirectional causality between FDI and stock market development indicators. For banking sector development indicators, the relationship is ambiguous and inconclusive. Care is therefore needed when analysing the relationship between FMD and FDI, as results may depend on whether the FMD variables used to evaluate causality are stock market or banking sector development indicators.
    Keywords: Foreign direct investment; FDI; financial market development; stock market development; banking sector development; causality
    JEL: O16 F21
    Date: 2011–03
  9. By: La Torre, Davide; Marsiglio, Simone; Privileggi, Fabio
    Abstract: We study a stochastic, discrete-time, two-sector optimal growth model in which the production of the homogeneous consumption good uses a Cobb-Douglas technology, combining physical capital and an endogenously determined share of human capital. Education is intensive in human capital as in Lucas (1988), but the marginal returns of the share of human capital employed in education are decreasing, as suggested by Rebelo (1991). Assuming that the exogenous shocks are i.i.d. and affect both physical and human capital, we build specific configurations for the primitives of the model so that the optimal dynamics for the state variables can be converted, through an appropriate log-transformation, into an Iterated Function System converging to an invariant distribution supported on a generalized Sierpinski gasket.
    Keywords: fractals, iterated function system, self-similarity, Sierpinski gasket, stochastic growth
    JEL: C61 O41
    Date: 2011–06
  10. By: Raouf Boucekkine (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Giorgio Fabbri (Dipartimento Matematica e statistica - Université de Naples); Fausto Gozzi (Dipartimento di Scienze Economiche e Aziendali - Libera Università INTERNAZIONALE DEGLI STUDI SOCIALI G. CARLI)
    Abstract: In this paper, we devise a social criterion in the spirit of the critical utility level of Blackorby-Donaldson (1984) to study an optimal population size problem in an endogenously growing economy populated by workers living a fixed amount of time and without capital accumulation. Population growth is endogenous. The problem is analytically solved, yielding closed-form solutions to optimal demographic and economic dynamics. It is shown that provided the economy is not driven to optimal finite time extinction, the optimal solution is egalitarian for appropriate choices of the critical utility levels: all individuals of any cohort are given the same consumption. The results obtained do not require any priori restriction of the values of the elasticity of intertemporal substitution unlike in several related papers.
    Keywords: Optimal population size; finite life span; critical utility value; optimal extinction; balanced growth paths
    Date: 2011–06–08
  11. By: Paun, Cristian
    Abstract: Integration into the European Monetary Union (EMU) and adoption of Euro became a specific objective for Eastern European Countries after their accession into the European Union. This objective implies specific nominal and real economic convergence for these countries within a given period of time (Copenhagen criteria). Nominal convergence measurement is based on well-defined system of economic indicators (Maastricht and Amsterdam criteria). Real convergence refers to real economic performance of a country and it is commonly associated with GDP growth rate and productivity level. From a broader perspective, real and nominal convergence could be seen as complementary. Tensions between real and nominal convergence are tested through Balassa – Samuelson Effect. In this paper it is analyzed the evolution of nominal and real convergence based on a proposed set of indicators and it is estimated Balassa-Samuelson Effect on non-Euro countries.
    Keywords: EMU; Euro; Optimal Currency Area; Balassa Samuelson Effect
    JEL: E42 F41 F33
    Date: 2010–03–15

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