nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒07‒02
eight papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Growth rates constrained by internal and external imbalances: a demand orientated approach. By Elias Soukiazis; Pedro Cerqueira; Micaela Antunes
  2. Information Rigidity in Growth Forecasts: Some Cross-Country Evidence By Herman Stekler; Prakash Loungani; Natalia T. Tamirisa
  3. China Since the Global Crisis: Ascent Uninterrupted? By Lampton, David; Shih, Victor
  4. Monetary aggregates, financial intermediate and the business cycle By Hong, Hao
  5. Augmented Solow Model with Mincerian Schooling and Infrastructure Externalities By Tomasz Brodzicki
  6. Can a pure real business cycle model explain the real exchange rate: the case of Ukraine By Onishchenko, Kateryna
  7. Credit Spead Interdependencies of European States and Banks during the Financial Crisis By Adrian Alter; Yves Stephan Schüler
  8. Benin's infrastructure : a continental perspective By Dominguez-Torres, Carolina; Foster, Vivien

  1. By: Elias Soukiazis (Faculdade de Economia/GEMF, Universidade de Coimbra); Pedro Cerqueira (Faculdade de Economia/GEMF, Universidade de Coimbra); Micaela Antunes (Faculdade de Economia/GEMF, Universidade de Coimbra)
    Abstract: Thirlwall’s Law considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. The aim of this paper is to fill this gap by developing a growth model in line with Thirlwall’s Law that takes into account both internal and external imbalances. The model is tested for Portugal that recently fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance-of-payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.
    Keywords: internal and external imbalances, import elasticities of the components of demand, equilibrium growth rates, 3SLS system regressions.
    JEL: C32 E12 H6 O4
    Date: 2011–06
  2. By: Herman Stekler; Prakash Loungani; Natalia T. Tamirisa
    Abstract: We document information rigidity in forecasts for real GDP growth in 46 countries over the past two decades. We investigate: (i) if rigidities are lower around turning points in the economy, such as in times of recessions and crises; (ii) if rigidities differ across countries, particularly between advanced countries and emerging markets; and (iii) how quickly forecasters incorporate news about growth in other countries into their growth forecasts, with a focus on how advanced countries‘ growth forecasts incorporate news about emerging market growth and vice versa.
    Date: 2011–06–01
  3. By: Lampton, David; Shih, Victor
    Abstract: David Lampton presents a wide-ranging analysis of the macro-economic strengths and potential weaknesses of China since 2008. He argues that China’s has a strong foundation for economic growth in the near and medium-term and suggests multiple reasons for this conclusion. He notes that this growth is likely to be secular but with occasional falls from unexpected shocks. He also considers several large problems that China faces on the macro-economic level especially in the areas of the environment, social organization and political adjustment. Victor Shih argues that the economic stimulus promoted by the Chinese central government from 2008 onward has been a great success on the surface. It is argued that the success of this Keynesian operation did not result in a huge growth of central government debt as a percentage of GDP. However, he goes on to show that while the central government was calling for stimulus, it was local governments who were tasked with putting the stimulus into operation. Local governments created investment companies who in turn used land titles to secure loans from banks. The borrowed capital was used for infrastructure development. However, it is unclear that infrastructure will be profitable and hence, difficult for local governments to repay the loans. The Chinese macro-economy has much more debt to GDP than the national statistics reveal and, thus, a much greater fragility to shocks.
    Keywords: American Politics, Political Science
    Date: 2011–04–18
  4. By: Hong, Hao (Cardiff Business School)
    Abstract: This paper explains and evaluates the transmissions and effectiveness of monetary policy shock in a simple Cash-in-Advance (CIA) economy with financial intermediates. Lucas-Fuerst's (1992) limited participation CIA models are able to explain decreasing nominal interest rates and increasing real economic activity with monetary expansion through limited participation monetary shock and the cost channel of monetary policy. Calvo's (1983) sticky price monetary model examines the real effects of money injections through firms price setting behaviour, but it fails to generate a negative correlation between nominal interest rates and money growth rate, which has been observed in the data. This paper employs McCandless (2008) financial intermediates CIA model to explain the transmissions and impacts of monetary shocks. The model does not request limited participation monetary shock or Keynesian type of sticky price/wage, to examine the lower nominal interest rate and increasing real economic activity with monetary expansion. By extending the model with Stockman's (1981) CIA constraint, it is able to account for both positive response of consumption subject to monetary innovations, which has been found in Leeper et al. (1996) and the positive correlation between output and consumption which has been observed in the data.
    Keywords: Monetary business cycle; financial intermediate; cash-in-advance model
    JEL: E44 E52
    Date: 2011–06
  5. By: Tomasz Brodzicki (Faculty of Economics, University of Gdansk)
    Abstract: According to Crescezni and Rodriguez-Pose (2008) backward European regions should follow balanced strategies in which infrastructure development is coordinated with policies aimed at developing human capital and the innovative potential of regions. In order to asses their postulates we extend the analysis of Carstensen et al. (2009) further augmenting the neoclassical Solow Model to incorporate both Mincerian schooling externalities and infrastructure externalities in a single theoretical framework. Infrastructure is introduced into the model in a manner similar to Hicks-neutral technological change – potentially rising overall efficiency of economy. We do not assume ax ante the existence of positive externality. Solving the model we obtain a structural equation which is then econometrically tested in order to obtain estimates of both education and infrastructure externalities for a group of European states. Estimates for panel data model bring interesting results. Infrastructure and education externalities are both postitive and statistically significant. The education externality is however significantly stronger for CEE countries while infrastructure externality is not statistically significant for the same group of countries.
    Keywords: economic growth, human capital, infrastructure development, augmented Solow model
    JEL: O41 H52 H54 C21 C23
    Date: 2011–06
  6. By: Onishchenko, Kateryna (Cardiff Business School)
    Abstract: Real exchange rate (RER) is an important instrument for restoring sustainable economic growth in the small open economy with large export share. RER of Ukrainian currency can be explained within the real business cycle (RBC) framework without any forms of nominal rigidities. Fitting Ukrainian quarterly data for the period of 1996:Q1-2009:Q3 into the small open economy real business cycle model and testing it by method of indirect inference shows that RER can be reproduced by RBC framework. The generated pseudo-samples for RER by method of bootstrapping allow to obtain the distribution of the best fit ARIMA(2,1,4) parameters and to show with the Wald statistics that those parameters lie within 95% confidence intervals of those estimated for bootstrapped pseudo Q parameters.
    Keywords: sustainable economic growth; business cycle; real exchange rates; small open economy; indirect inference; ARIMA
    JEL: E31 E32 E37 F31 F37
    Date: 2011–06
  7. By: Adrian Alter (Department of Economics, University of Konstanz, Germany); Yves Stephan Schüler (Department of Economics, University of Konstanz, Germany)
    Abstract: This study analyzes the relationship between the default risk of several European states and financial institutions during the period June 2007 - May 2010. It investigates how this linkage was impacted by government bailout schemes. We consider sovereign credit default swap (CDS) spreads from seven EU countries (France, Germany, Italy, Ireland, Netherlands, Portugal, and Spain) together with a selection of bank CDS series from these states. Long-run and short-run dependencies between states and their domestic banks are studied within a vector error correction framework and additionally considering generalized impulse responses. Our main findings suggest that in the period preceding government interventions the contagion from bank credit spreads disperses into the sovereign CDS market. After government interventions, sovereign spreads are found relatively more important in the price discovery mechanism of banks’ CDS series. Moreover, the variability in linkages between bank and sovereign CDS spreads can be associated with differences in state support measures accessed by each bank. We suggest that country specific characteristics may explain the noticeable differences in outcomes of government interventions.
    Keywords: credit default swaps, private-to-public risk transfer, cointegration, generalized impulse responses.
    JEL: G18 G21
    Date: 2011–05–15
  8. By: Dominguez-Torres, Carolina; Foster, Vivien
    Abstract: Between 2000 and 2005 infrastructure made an important contribution of 1.6 percentage points to Benin's improved per capita growth performance, which was the highest among West African countries during the period. Raising the country's infrastructure endowment to that of the region's middle-income countries could boost annual growth by about 3.2 percentage points. Benin has made significant progress in some areas of its infrastructure, including roads, air transport, water, and telecommunications. But the country still faces important infrastructure challenges, including improving road conditions and port performance and upgrading deteriorating electrical infrastructure. The nation must also improve the quality and efficiency of its water and sanitation systems. Benin currently spends about $452 million a year on infrastructure, with almost $101 million lost to inefficiencies. Comparing spending needs with existing spending and potential efficiency gains leaves an annual funding gap of $210 million per year. Benin has the potential to close that gap by adopting alternative technologies in water supply, transport, and power, which could save as much as $227 million a year. The nation would also benefit from raising tariffs to cost-recovery levels and reducing inefficiencies, which could substantially boost financial flows to the infrastructure sectors.
    Keywords: Transport Economics Policy&Planning,Infrastructure Economics,Public Sector Economics,Town Water Supply and Sanitation,Economic Theory&Research
    Date: 2011–06–01

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.
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