nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒08‒09
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Monetary-fiscal-trade policy and economic growth in Pakistan: Time series empirical investigation By Jawaid, Syed Tehseen; Faisal Sultan Qadri, Faisal; Ali, Nasir
  2. A model of longevity, human capital and growth By Oscar Iván AVILA MONTEALEGRE
  3. On the Growth and Stability E¡èects of Habit Formation and Durability in Consumption By Shu-Hua Chen
  4. Finance and growth: Schumpeter might be wrong in our era. New evidence from Meta-analysis By Simplice A , Asongu
  5. Is devaluation contractionary? empirical evidence for Pakistan By Muhammad, Shahbaz; Faridul, Islam; Naveed, Aamir
  7. Optimal policy and non-scale growth with R&D externalities By Valente, Simone
  8. Identifying the Effects of Government Spending Shocks with and without Expected Reversal: an Approach Based on U.S. Real-Time Data By Jacopo Cimadomo, Sebastian Hauptmeier, Sergio Sola
  9. What Explains Prevalence of Informal Employment in European Countries: The Role of Labor Institutions, Governance, Immigrants, and Growth By Hazans, Mihails

  1. By: Jawaid, Syed Tehseen; Faisal Sultan Qadri, Faisal; Ali, Nasir
    Abstract: This study empirically examines the effect of monetary, fiscal and trade policy on economic growth in Pakistan using annual time series data from 1981 to 2009. Money supply, government expenditure and trade openness are used as proxies of monetary, fiscal and trade policy respectively. Cointegration and error correction model indicate the existence of positive significant long run and short run relationship of monetary and fiscal policy with economic growth. Result also indicates that monetary policy is more effective than fiscal policy in Pakistan. In contrast, trade policy has insignificant effect on economic growth both in the short run and in the long run. In light of the findings, it is suggested that the policy makers should focus more on monetary policy in order to ensure economic growth in the country. It is also recommended that further research should be conducted to find out such components of exports and imports which lead to the ineffectiveness of trade policy to enhance economic growth in Pakistan.
    Keywords: Monetary; Fiscal; Trade; Economic Growth
    JEL: E62 F13 E42 F43
    Date: 2011–06–09
    Abstract: Long run economic growth and its transitional dynamics are determined in a general equilibrium model of endogenous longevity, human capital and growth. Agents in overlapping generations survive safely for the first two periods of life and face an endogenous probability of surviving for a third period. Given this probability, each agent maximizes her expected lifetime utility choosing consumption, and the quantity of resources destined to her child’s education and health. Human capital accumulation depends on education and health expenditures and on parent’s human capital. The model produces two kinds of equilibriums, one with high life expectancy, human capital and GDP, and the other with low high life expectancy, human capital and GDP. These predictions accord with the empirical evidence on demographic transitions and development.
    Date: 2010–11–03
  3. By: Shu-Hua Chen (National Taipei Universityy)
    Abstract: This paper shows that a unique balanced growth monetary equilibrium exists in a transactions-based monetary endogenous growth model with habit formation or durability in consumption. An increase in the nominal money growth rate reduces the long-run output growth rate, wherein habit formation enforces the effectiveness of monetary policy while durability in consumption reduces it. We also show that while habit formation destabilizes the macroeconomy by making the balanced growth equilibrium to exhibit local indeterminacy, durability in consumption maintains saddle-path stability of the balanced growth equilibrium. We find that the mechanism through which habit formation and durability impose different effects on both the growth-e¡èect of money and the macroeconomic stabilizing properties is that they influence the elasticity of intertemporal substitution in consumption in opposite directions.
    Keywords: Habit formation, Durability, Superneutrality, Indeterminacy
    JEL: E21 E52 O42
    Date: 2011–07–30
  4. By: Simplice A , Asongu
    Abstract: This paper seeks to bridge the gap between Schumpeterian authors and sympathizers of Andersen and Tarp (2003). As far as we have perused, the absence of a meta-study in the finance-growth nexus literature is an important missing link. Methodically narrowing down from 186 papers to a summary of 20 studies with 197 outcomes, we use 20 comparison criteria to evaluate which factors have influenced the phenomenon over the past decades. Using dynamics of financial depth and financial activity, our meta-findings provide support for Andersen and Tarp (2003) in concluding that contrary to Schumpeterian authors, the positive link between finance and growth has not been sufficiently sustained by recent empirical works. The frequency of financial crisis that inhibit the finance-led-growth nexus is more preponderant in our era than it was in the days of Schumpeter. The study also accounts for the presence of publication bias in the literature which further vindicates an anti-Schumpeterian thesis.
    Keywords: Meta analysis; Finance; Economic growth; Publication bias
    JEL: E0 O1 C1 C4
    Date: 2011–08–03
  5. By: Muhammad, Shahbaz; Faridul, Islam; Naveed, Aamir
    Abstract: The paper investigates the effect of real devaluation on economic growth. In the empirical model we also include other theoretically justified variables in the case of Pakistan, such as foreign remittances, money supply, and government spending. The paper implements the ADF method to test check the stationarity of the series; and the ARDL bounds testing approach to cointegration to establish a long run relationship. The findings affirm cointegration among the series. Real devaluation exerts contractionary effect on economic growth. The results from variance decomposition and impulse response-function show unidirectional causality from foreign remittances to economic growth; and bidirectional causality between money supply and foreign remittances. Furthermore, money supply Granger causes government spending; while devaluation Granger causes economic growth, albeit, weakly. The results should help in formulating a comprehensive trade policy including the use of competitive devaluation as a tool to correct balance of payments problems.
    Keywords: Devaluation; Contractionary; Cointegration
    JEL: F3
    Date: 2011–07–27
  6. By: Nazima Ellahi; Dr. Mehboob Ahmad (Foundation University College of Liberal Arts and Sciences Rawalpindi)
    Abstract: Foreign aid (FA) and foreign direct investment (FDI) a phenomenon of cold war in the post world war-II arena. The dollar recipient countries utilized these funds to augment their developmental activities, curtail balance of payment distortions, enhance the pace of economic growth etc. However, this study was, mainly, devised to check the joint effect of FA and FDI on overtime economic growth of Pakistan. In this regard, time series data over the period 1975-2010 including different support variables i.e. labor force and investment along with target indicators were rendered in the model for the assessment of relationship empirically. Moreover, properties of the data were, properly, diagnosed prior to employ ARDL estimation approach introduced by, Pesaran, and Shin (2000). The study found a robust and direct positive relationship between economic inflow of foreign capital and economic performance indicators, the inflow include foreign aid and FDI. However, the magnitude of foreign aid impact was explored considerably low as compared to FDI. In the end, it is suggested that though impacts of capital inflows are positive but economies must rely upon the indigenous resources to promote development rather depending on external factors
    JEL: M0
    Date: 2011–03
  7. By: Valente, Simone
    Abstract: An established result of the endogenous growth literature is that laissez-faire equilibria in expanding-varieties models are suboptimal due to the rent-effect: monopolistic pricing drives the equilibrium quantity of each intermediate input below the efficient level, implying that it is optimal to subsidize …final producers. This paper shows that, if scale effects are eliminated by introducing R&D spillovers, normative prescriptions change. Since the laissez-faire economy under-invests into R&D activity, the share of resources devoted to intermediates' production increases and this reallocation effect contrasts the rent-effect. In many scenarios, including the polar case of logarithmic preferences, the reallocation effect surely dominates. The equilibrium quantity of each intermediate exceeds the optimal level and the optimal policy consists of taxing, instead of subsidizing fi…nal producers because fi…scal authorities must redirect the extra-output generated by under-investment towards R&D activity.
    Keywords: Endogenous Growth; Scale Effects; R&D Externalities; Optimal Policy;
    JEL: O41 O31
    Date: 2011–07–29
  8. By: Jacopo Cimadomo, Sebastian Hauptmeier, Sergio Sola (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper investigates how expectations about future government spending affect the transmission of fiscal policy shocks. We study the effects of two different types of government spending shocks in the United States: (i) spending shocks that are accompanied by an expected reversal of public spending growth below trend; (ii) spending shocks that are accompanied by expectations of future spending growth above trend. We use the Ramey (2011)’s time series of military build-ups to measure exogenous spending shocks, and deviations of forecasts of public spending with respect to past trends, evaluated in real-time, to distinguish shocks into these two categories. Based on a structural VAR analysis, our results suggest that shocks associated with an expected spending reversal exert expansionary effects on the economy and accelerate the correction of the initial increase in public debt. Shocks associated with expected spending growth above trend, instead, are characterized by a contraction in aggregate demand and a more persistent increase in public debt. The main channel of transmission seems to run through agents’ perception of the future macroeconomic environment.
    Keywords: Government spending shocks, Survey of Professional Forecasters, Real-time data, Spending reversal, Fiscal multipliers.
    JEL: E62 E65 H20
    Date: 2011–07
  9. By: Hazans, Mihails (University of Latvia)
    Abstract: European Social Survey data on 30 countries, covering years 2004-2009, are used to look into joint institutional [and other macro] determinants of the rates of dependent employment without a contract, informal self-employment, and unemployment (secondary jobs are not accounted for). Consistently with theoretical predictions, quality of business environment has a significant negative impact on prevalence of both types of informal employment. The share of non-contracted employees is negatively affected by perceived quality of public services and is positively related to economic growth. GDP per capita has a positive impact on informality in Europe at large and within Eastern and Southern Europe. Other things equal, the share of non-contracted employees in the labor force across all European countries increases with the minimum-to-average wage ratio, with union density, with the share of first and second generation immigrants, and with income inequality, but falls with stricter employment protection legislation (EPL) and higher tax wedge on labor. Thus it appears that in Europe at large, labor cost effects of EPL and taxes are weaker than their impact via perceptions of job security and law enforcement, along with tax morale and the income effect. Yet the EPL effect on informality is positive (i.e., cost-related) when either Eastern and Southern Europe or Western and Northern Europe are considered separately. Furthermore, within Western and Northern Europe, the minimum wage effect is negative, whilst within Eastern and Southern Europe, the union effect is negative. Various panel data methods are used to confirm the robustness of the results.
    Keywords: labor market institutions, informal employment, immigrants, ethnic minorities
    JEL: J08 J21 J51 J61 K31
    Date: 2011–07

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