nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒08‒15
twenty papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. "Government Outlays, Economic Growth and Unemployment: A VAR Model" By Siyan Wang; Burton A. Abrams
  2. Monetary-fiscal-trade policy and economic growth in Pakistan: time series empirical investigation By Syed tehseen, jawaid; Faisal sultan, qadri; Nasir, ali
  3. The effects of financial development, economic growth, coal consumption and trade openness on environment performance in South Africa By Muhammad, Shahbaz; Tiwari, Aviral; Muhammad, Nasir
  4. Human Capital and Growth: Specification Matters By Sunde, Uwe; Vischer, Thomas
  5. Effects of Terms of Trade and its Volatility on Economic Growth: A Cross Country Empirical Investigation By Syed tehseen, jawaid; Abdul, waheed
  6. Growth and exchange rate volatility: a panel data analysis By Brito, Márcio Holland de; Vieira, Flávio Vilela; Silva, Cleomar Gomes da; Bottecchia, Luiz Carlos
  7. Real Exchange Rates and Growth Surges By Darryl McLeod; Elitza Mileva
  8. Product variety, product quality, and evidence of Schumpeterian endogenous growth: a note By Francesco Venturini
  9. Rebalancing China’s economic growth: some insights from Japan’s experience By Muto, Ichiro; Fukumoto, Tomoyuki
  10. Weathering the financial crisis: good policy or good luck? By Stephen Cecchetti; Michael R King; James Yetman
  11. The dynamics of French public debt: Paths for fiscal consolidations By Esposito, Piero; Paradiso, Antonio; Rao, B. Bhaskara
  12. What said the neoclassical and endogenous growth theories about Portugal? By Martinho, Vítor João Pereira Domingues
  13. Learning from developing country experience : growth and economic thought before and after the 2008-09 crisis By Harrison, Ann; Sepulveda, Claudia
  14. Endogenous Enforcement of Intellectual Property, North-South Trade, and Growth By Andreas Schäfer; Maik T. Schneider
  15. The Role of Monetary Policy in Turkey during the Global Financial Crisis (Kuresel Kriz Doneminde Turkiye'de Para Politikasinin Rolu) By Harun Alp; Selim Elekdag
  16. An estimate of the potential growth of the Spanish economy By Pablo Hernández de Cos; Mario Izquierdo; Alberto Urtasun
  17. House Prices and Economic Growth in South Africa: Evidence from Provincial-Level Data By Beatrice D. Simo-Kengne; Manoel Bittencourt; Rangan Gupta
  18. Convergence and Distortions: the Czech Republic, Hungary and Poland between 1996–2009 By István Kónya
  19. Trade Liberalization and Growth: Plant-Level Evidence from Switzerland By Bühler, Stefan; Helm, Marco; Lechner, Michael
  20. Health and Economic Development - Evidence from the Introduction of Public Health Care By Strittmatter, Anthony; Sunde, Uwe

  1. By: Siyan Wang (Department of Economics,University of Delaware); Burton A. Abrams (Department of Economics,University of Delaware)
    Abstract: This paper examines the dynamic effects of government outlays on economic growth and the unemployment rate. Using vector autoregression and data from twenty OECD countries over three recent decades, we found: (1) positive shocks to government outlays slow down economic growth and raise the unemployment rate; (2) different types of government outlays have different effects on growth and unemployment, with transfers and subsidies having a larger effect than government purchases; (3) causality runs one-way from government outlays to economic growth and the unemployment rate; (4) the above results are not sensitive to how government outlays are financed.
    Keywords: government outlays, economic growth, unemployment rate, vector autoregression, Granger causality
    JEL: C12 C32 H50 J64 O40
    Date: 2011
  2. By: Syed tehseen, jawaid; Faisal sultan, qadri; Nasir, ali
    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: 2011–07–21
  3. By: Muhammad, Shahbaz; Tiwari, Aviral; Muhammad, Nasir
    Abstract: This paper explores the effects of financial development, economic growth, coal consumption and trade openness on environmental performance using annual data over the period of 1965-2008 for South African economy. ARDL bounds testing approach to cointegration has used to test the long run relationship among the variables while short run dynamics have been investigated by applying error correction method (ECM). Unit root problem is checked through Saikkonen and Lutkepohl [1] structural break unit root test. Our findings confirmed long run relationship among the variables. Results showed that a rise in economic growth increases energy emissions while financial development lowers it. Coal consumption has significant contribution to deteriorate environment significantly. Trade openness improves environmental quality by lowering the growth of energy pollutants. EKC is also existed.
    Keywords: Coal Consumption; Economic Growth; Environment
    JEL: F18 P28
    Date: 2011–08–02
  4. By: Sunde, Uwe; Vischer, Thomas
    Abstract: This paper suggests that the weak empirical effect of human capital on growth in existing cross-country studies is partly the result of an inappropriate specification that does not account for the different channels through which human capital aspects growth. A systematic replication of earlier results from the literature shows that both, initial levels and changes in human capital, have positive growth effects, while in isolation, each channel often appears insignificant. Studies that do not account for both channels might underestimate the effect of human capital due to convergence in human capital, in particular when measuring human capital in log average years of schooling. This study therefore complements alternative explanations for the weak growth effects of human capital based on outlier observations and measurement issues.
    Keywords: Human Capital, Growth Regressions, Specification.
    JEL: O47 O11 O15 E24
    Date: 2011–08
  5. By: Syed tehseen, jawaid; Abdul, waheed
    Abstract: This study examines the effects of terms of trade and its volatility on economic growth for a sample of 94 developed and developing countries, using five year average annual data from 2004 to 2008. The cross country ordinary least square estimation results indicate significant positive effect of terms of trade on economic growth. Furthermore, volatility of terms of trade has significant positive effect on economic growth. To test the robustness of initial results, sensitivity analysis has been performed using different additional variables, sample size and various proxies of volatility variable. The initial results were found robust despite the inclusion of various variables in the basic model and use of various proxies for volatility of terms of trade.
    Keywords: Terms of trade; Volatility; Economic Growth
    JEL: F42 F13 D80
    Date: 2011–05–07
  6. By: Brito, Márcio Holland de; Vieira, Flávio Vilela; Silva, Cleomar Gomes da; Bottecchia, Luiz Carlos
    Abstract: The aim of this article is to assess the role of real effective exchange rate volatility on long-run economic growth for a set of 82 advanced and emerging economies using a panel data set ranging from 1970 to 2009. With an accurate measure for exchange rate volatility, the results for the two-step system GMM panel growth models show that a more (less) volatile RER has significant negative (positive) impact on economic growth and the results are robust for different model specifications. In addition to that, exchange rate stability seems to be more important to foster long-run economic growth than exchange rate misalignment
    Date: 2011–08–04
  7. By: Darryl McLeod (Fordham University, Department of Economics); Elitza Mileva (European Central Bank)
    Abstract: Maintaining a weak real exchange rate is a widely recommended growth strategy, in part because of the success of Asian exporters, most recently China. Simulations of a simple two-sector open economy growth model based on Matsuyama (1992) suggest that a weaker real exchange rate can lead to a "growth surge", as workers move into traded goods industries with more "learning by doing" and exit non-traded goods sectors with slower productivity growth. Using the updated total factor productivity (TFP) estimates from Bosworth and Collins (2003) we test this model in a panel of 58 countries. We find the anticipated non-linear relationship between the real exchange rate and TFP growth: beyond a certain point real currency depreciation reduces TFP and GDP growth. Manufacturing exports appear to be one channel via which the real exchange rate affects TFP growth. Fears that a weaker real exchange rate might reduce investment and therefore productivity growth by making imported equipment more expensive are not supported by our estimates.
    Keywords: Economic growth, total factor productivity growth, exchange rate policy
    JEL: O14 O41 O47 O57
    Date: 2011
  8. By: Francesco Venturini
    Abstract: Using US manufacturing industry data, this paper re-examines empirical evidence of first- and second-generation Schumpeterian models of endogenous growth focusing on innovation (patent) quality. It shows that semi-endogenous growth models behave better than the other strands of Schumpeterian theory especially in the knowledge-intensive section of the economy.
    Keywords: fully endogenous growth theory, semi-endogenous growth theory, innovation quality, US manufacturing, high-tech industries.
    JEL: O3 O4
    Date: 2011–07–01
  9. By: Muto, Ichiro; Fukumoto, Tomoyuki
    Abstract: One of the greatest challenges China faces is how to reshape its heavily investment-driven mode of economic growth. By investigating how the rebalancing of Japan’s economic growth mode was realized in the 1970s, we indicate that it is essential in the rebalancing to correct the distortions in the factor cost (labor cost and capital cost) in a harmonious way. In addition, we refer to Japan’s experience to indicate that achieving domestic rebalancing does not necessarily lead to external rebalancing.
    Keywords: China; Japan; Rebalancing; Factor Cost Distortion; Current Account Imbalance
    JEL: O11 E25 O53 E22 E21
    Date: 2011–08–04
  10. By: Stephen Cecchetti; Michael R King; James Yetman
    Abstract: The macroeconomic performance of individual countries varied markedly during the 2007-09 global financial crisis. While China's growth never dipped below 6% and Australia's worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5-10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country's macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, lower loan-to-deposit ratios, a current account surplus, high foreign exchange reserves and low levels and growth rates of private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.
    Keywords: financial crisis, principal components
    Date: 2011–08
  11. By: Esposito, Piero; Paradiso, Antonio; Rao, B. Bhaskara
    Abstract: We analyze possible targets for the French debt-to-GDP ratio with a small model. The role of the US and German GDP growth, prices of raw materials, ECB monetary policy, and domestic policy is analyzed in the debt dynamics. We find that external conditions, together with policies to stimulate growth and to generate a government surplus, play a fundamental role in the French fiscal consolidation.
    Keywords: Debt to GDP Ratio; French Economy; International Factors
    JEL: E62 H68 H63
    Date: 2011–07–15
  12. By: Martinho, Vítor João Pereira Domingues
    Abstract: The aim of this paper is to present a further contribution, with panel data, to the analysis of absolute convergence ( and ), associated with the neoclassical theory, and conditional, associated with endogenous growth theory, of the sectoral productivity at regional level. Presenting some empirical evidence of absolute convergence of productivity for each of the economic sectors in each of the regions of mainland Portugal (NUTS III) in the period from 1995 to 1999. They are also presented empirical evidence of conditional convergence of productivity, for each of the economic sectors of the NUTS II of Portugal, from 1995 to 1999. The structural variables used in the analysis of conditional convergence is the ratio of capital/output, the flow of goods/output and location ratio. This study analyses, also, through cross-section estimation methods, the influence of spatial effects and human capital in the conditional productivity convergence in the economic sectors of NUTs III of mainland Portugal between 1995 and 2002. This study analyses, yet, through cross-section estimation methods, the influence of spatial effects in the conditional product convergence in the parishes’ economies of mainland Portugal between 1991 and 2001. The conclusions depend of the period and of the method used.
    Keywords: convergence; spatial econometrics; Portuguese regions
    JEL: O47 O18 C23 C21 R11
    Date: 2011
  13. By: Harrison, Ann; Sepulveda, Claudia
    Abstract: The aim of this paper is twofold. First, it documents the changing global landscape before and after the crisis, emphasizing the shift towards multipolarity. In particular, it emphasizes the ascent of developing countries in the global economy before, during, and after the crisis. Second, it explores what these global economic changes and the recent crisis imply for shifts in the direction of research in development economics. The paper places a particular emphasis on the lessons that developed countries can learn from the developing world.
    Keywords: Achieving Shared Growth,Emerging Markets,Population Policies,Economic Theory&Research,Debt Markets
    Date: 2011–08–01
  14. By: Andreas Schäfer (University of Leipzig, Germany); Maik T. Schneider (ETH Zurich, Switzerland)
    Abstract: While most countries have harmonized intellectual property rights (IPR) legislation, the dispute about the optimal level of IPR-enforcement remains. This paper develops an endogenous growth framework with two open economies satisfying the classical North-South assumptions to study (a) IPR-enforcement in a decentralized game and (b) the desired globally-harmonized IPR-enforcement of the two regions. The results are compared to the constrained-efficient enforcement level. Our main insights are: The regions’ desired harmonized enforcement levels are higher than their equilibrium choices, however, the gap between the two shrinks with relative market size. While growth rates substiantially increase when IPR-enforcement is harmonized at the North’s desired level, our numerical simulation suggests that the South may also benefit in terms of long-run welfare.
    Keywords: Endogenous Growth, Intellectual Property Rights, Trade, Dynamic Game
    JEL: F10 F13 O10 O30
    Date: 2011–08
  15. By: Harun Alp; Selim Elekdag
    Abstract: As an emerging economy, Turkey is an interesting case study because it was one of the hardest hit countries by the crisis, with a year-over-year contraction of 15 percent during the first quarter of 2009. At the same time, anticipating the fallout from the crisis, the Central Bank of the Republic of Turkey (CBRT) decreased policy rates by an astounding 1025 basis points over the November 2008 to November 2009 period. In this context, this paper addresses the following broad question: If an inflation targeting framework underpinned by a flexible exchange rate regime was not adopted, how much deeper would the recent recession have been? Taking the most intense year of the crisis as our baseline, namely 2009, counterfactual simulations indicate that rather than the actual contraction of –4.8 percent, the growth outturn would have been –6.2 percent if the CBRT had not implemented countercyclical and discretionary interest rate cuts. Further, if a fixed exchange rate regime was instead in place, then the counterfactual simulations indicate a growth rate of –8.0 percent in 2009. In other words, the interest rate cuts implemented by the CBRT and exchange rate flexibility both helped substantially soften the impact of the global financial crisis. These counterfactual experiments are based on an estimated structural model which along with standard nominal and real rigidities, include a financial accelerator mechanism in an open-economy framework.
    Keywords: Financial Accelerator, Bayesian Estimation, DSGE Model, Financial Crises, Sudden Stops, Monetary Policy, Turkey, Emerging Economies, Emerging Markets
    JEL: E5 F3 F4 C11
    Date: 2011
  16. By: Pablo Hernández de Cos (Banco de España); Mario Izquierdo (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: This paper seeks to estimate the potential output of the Spanish economy, using the production function methodology standard in the literature. According to these estimates, the growth of the potential output of the Spanish economy stood at around 3% in the period 2000-2007, owing to the marked increase in the population and in the participation rate and the fall in structural unemployment, as well as vigorous capital accumulation. The contribution of these factors to potential output was reduced by the negative evolution of total factor productivity. In addition, the economic crisis is estimated to have had a significant negative impact on potential output, which has primarily taken the form of a large increase in structural unemployment, a sharp slowdown in population growth, as a consequence of the loss of momentum in immigrant inflows, and a reduction in the contribution of the capital stock resulting from the impact of the crisis on investment. As a result, the potential growth of the Spanish economy stands at around 1% during the crisis years and in the years immediately thereafter, insofar as some of these negative effects take place with a certain time lag. Lastly, in the medium term, the potential output of the economy is estimated to recover progressively, once the effects of the crisis have disappeared, reaching growth rates about 2%, against a background of negative rates of change in the population of age 16-64, a smooth improvement in the NAIRU, a slight recovery in investment and a higher contribution from TFP. The application of a strong process of structural reforms could, however, significantly improve the growth prospects of our economy.
    Keywords: Potential output, output gap, Spain
    JEL: E23 E32
    Date: 2011–08
  17. By: Beatrice D. Simo-Kengne (Department of Economics, University of Pretoria); Manoel Bittencourt (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper empirically examines the effect of house price changes on economic growth across provinces in South Africa. The economic impact of house prices is estimated using a panel data set that covers all nine provinces in South Africa from 1996 to 2010. We find that when heterogeneity, endogeneity and spatial dependence are controlled for, house price changes exhibit a significant effect on regional economic growth in South Africa. The paper then introduces a Seemingly Unrelated Regression (SUR) specification and shows that spatial effects are highly important in South African housing markets. Moreover, the estimation results suggest that the wealth effect is important at the aggregated level which contrasts the relevance of the collateral effect found at the regional level.
    Keywords: House prices, Economic growth, Spatial dependence, Panel data
    JEL: C33 E23 E24 R11 R12
    Date: 2011–08
  18. By: István Kónya (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: The paper interprets the growth and convergence experience of three Central-Eastern European economies (the Czech Republic, Hungary, and Poland) through the lens of the stochastic neoclassical growth model. It adapts the methodology of Business Cycle Accounting (Chari, Kehoe and McGrattan 2007) to economies on a transition path. The paper uses the method to uncover distortions (‘wedges’) on the labor and capital markets, and then presents various comparisons and counterfactuals based on them. Results show that (i) capital and labor market distortions vary across the three economies, but they are well within the range of advanced economies; (ii) the Polish and Hungarian labor wedges are high, and the Czech labor wedge increases; (iii) the evolution of Hungarian wedges followed a different path than the evolution of Polish and Czech wedges, and (iv) realistic reductions in the capital and labor wedges would lead to significant output gains for Hungary and Poland.
    Keywords: convergence, distortions, Central-Eastern Europe, business cycle accounting
    JEL: E13 O11 O47
    Date: 2011
  19. By: Bühler, Stefan; Helm, Marco; Lechner, Michael
    Abstract: This paper estimates the effect of trade liberalization on growth, using plant-level data from Switzerland. We employ a natural experiment framework to quantify the effect of a bundle of treaties liberalizing trade between Switzerland and the EU enacted in June 2002 ("Bilateral Agreements I") on the growth of Swiss plants. Using both a semi-parametric difference-indifferences and a matching approach, we find that the liberalization of trade increased the growth of affected plants by 1-2 percent during the first six years after liberalization. Our results suggest that trade liberalization has a relevant effect on growth.
    Keywords: Trade liberalization, growth, plant size, policy evaluation
    JEL: C31 F13 F43 L25 O47 O52
    Date: 2011–08
  20. By: Strittmatter, Anthony; Sunde, Uwe
    Abstract: This paper investigates the causal effect of changes in health on economic development using a long panel of European countries. Identification is based on the particular timing of the introduction of public health care systems in different countries, which is the random outcome of a political process. We document that the introduction of public health care systems had a significant immediate effect on the dynamics of infant mortality and crude death rates. The findings suggest that a reduction in infant mortality or crude death rates exhibited a positive effect on growth in income per capita and increased population growth.
    Keywords: Mortality, Economic Development, Growth, Public Health Care.
    JEL: I10 J10 O11 N13
    Date: 2011–08

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