nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒08‒29
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial Development, International Trade and Economic Growth: Empirical Evidence from Pakistan By Shaheen, Safana; Awan, Masood Sarwar; Waqas, Muhammad; Aslam, Muhammad Amir
  2. Does finance matter for growth? what the data show By Sarkar, Prabirjit
  3. Finance and Income Inequality: What Do the Data Tell Us? By George R. G. Clarke; Lixin Colin Xu; Heng-fu Zou
  4. Macroprudential regulation of credit booms and busts -- the case of Croatia By Kraft, Evan; Galac, Tomislav
  5. Transition Dynamics in the Neoclassical Growth Model: The Case of South Korea By Yongsung Chang; Andreas Hornstein
  6. Opening Japan: Comparisons with Other G20 Countries and Lessons Learned from International Experience By Andrea Beltramello; Koen De Backer; Victor Mercader; Laurent Moussiegt
  7. From Tradition to Modernity: Economic Growth in a Small World By Lindner, Ines; Strulik, Holger
  8. Banking flows and financial crisis -- financial interconnectedness and basel III effects By Ghosh, , Swati R.; Sugawara, Naotaka; Zalduendo, Juan
  9. Temporal structure of firm growth and the impact of R&D By Schimke, Antje; Brenner, Thomas
  10. Dynamically optimal R&D subsidization By Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
  11. The Policy and Institutional Drivers of Economic Growth Across OECD and Non-OECD Economies: New Evidence from Growth Regressions By Romain Bouis; Romain Duval; Fabrice Murtin
  12. Rare Macroeconomic Disasters By Robert J. Barro; José F. Ursua

  1. By: Shaheen, Safana; Awan, Masood Sarwar; Waqas, Muhammad; Aslam, Muhammad Amir
    Abstract: The study utilizes the Autoregressive-distributed lag (ARDL) approach for cointegration and Granger causality test, to explore the long run equilibrium relationship and the possible direction of causality between international trade, financial development and economic growth for the Pakistan economy. Imports plus exports of goods and services is used as a proxy for international trade, while broad money (M2) and gross domestic product (GDP) are used as the proxies for financial development and economic growth, respectively. Result explores a long run relationship between the variables. In case of Pakistan, economy supply leading hypothesis is accepted. Moreover, unidirectional causality is observed from international trade to economic growth and from financial development to international trade.
    Keywords: Financial development; international trade; economic growth; Pakistan
    JEL: O1 F4 O16
    Date: 2011
  2. By: Sarkar, Prabirjit
    Abstract: This paper analyses the relationship between financial development (as measured by expansion of domestic credit to private sector relative to GDP) and growth for a sample of 65 less developed countries over a long period, 1980-2006. Using causality tests at various lag-orders we find a strong evidence of mutual causation. We have used alternative dynamic panel data models to estimate the relationships between the two. While the mean group model suggests no relationship in either direction, the pooled mean group model and dynamic fixed effect model show two opposite long-term relationships: finance-to-growth relationship is negative whereas growth-to-finance link is positive.
    Keywords: financial development; growth; dynamic panel data analysis
    JEL: O16 E44 O50 G20
    Date: 2011
  3. By: George R. G. Clarke (Research Department, World Bank); Lixin Colin Xu (Research Department, World Bank; Guanghua School of Management, Peking University); Heng-fu Zou (Research Department, World Bank)
    Abstract: Although there are distinct conjectures about the relationship between finance and income inequality, little empirical research compares their explanatory power. We examine the relationship between finance and income inequality for 83 countries between 1960 and 1995. Because financial development might be endogenous, we use instruments from the literature on law, finance, and growth to control for this. Our results suggest that, in the long run, inequality is less when financial development is greater, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993). Although the results also suggest that inequality might increase as financial sector development increases at very low levels of financial sector development, as suggested by Greenwood and Jovanovic (1990), this result is not robust. We reject the hypothesis that financial development benefits only the rich. Our results thus suggest that in addition to improving growth, financial development also reduces inequality.
    JEL: D3 G2 O1
    Date: 2011
  4. By: Kraft, Evan; Galac, Tomislav
    Abstract: Croatia employed macroprudential measures to manage credit growth and capital inflows during the boom years of the 2000s, including reserve requirements on loan growth, a marginal reserve requirement on increases in foreign liabilities, foreign exchange liquidity minima, and elevated capital adequacy ratios. Although quantitative analysis is complicated by substantial overlaps among measures, the econometric results in this paper suggest that the measures were most effective in requiring banks to hold high liquidity and capital buffers, and less effective in slowing credit growth and capital inflows. Larger buffers seem to have helped Croatian banks weather the financial crisis, making the adjustments to capital and liquidity during the crisis smaller.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Emerging Markets,Bankruptcy and Resolution of Financial Distress
    Date: 2011–08–01
  5. By: Yongsung Chang (University of Rochester); Andreas Hornstein (Federal Reserve Bank of Richmond)
    Abstract: Many cases of successful economic development, such as South Korea, exhibit long periods of sustained capital accumulation rates. This empirical feature is at odds with the standard neoclassical growth model which predicts initially high and then declining capital accumulation rates. We show that minor modifications of the neoclassical model go a long way towards accounting for the transition dynamics of the South Korean economy. Our modifications recognize that (1) agriculture essentially does not use reproducible capital, and that during the transition period (2) the relative price of capital declines substantially, and (3) the nonfarm employment share increases substantially.
    Keywords: neoclassical growth model, transition dynamics, industrialization, price of capital, South Korea
    JEL: E13 E22 O11 O13 O14 O16 O4 O53
    Date: 2011–07
  6. By: Andrea Beltramello; Koen De Backer; Victor Mercader; Laurent Moussiegt
    Abstract: Openness has been shown to be an important driver of economic growth. Because of the broad character of the current globalisation process, openness has many dimensions: trade (in both goods and services), foreign direct investment (FDI), circulation of people (including the highly skilled), and internationalisation of R&D, technology and knowledge. Economies not only benefit from inward flows of goods, services, people, capital and knowledge, but also from outward flows of those factors of production. But economic openness does not necessarily yield automatic benefits, and governments may need to complement policies to open the economy with policies that help individuals and firms adjust to liberalisation and ensure that aggregate benefits for the domestic economy are optimised. This working paper aims to assess the openness of the Japanese economy and to show how policies promoting openness are conducive to long-term growth. First, the paper benchmarks Japan in terms of openness in an international perspective relative to other G20 countries. Second, it reviews the theoretical and empirical literature on the link between openness and economic growth. Third, it illustrates the role that governments can play in stimulating openness and growth by presenting several case studies of countries that have implemented specific policies to promote openness in particular domains.
    Date: 2011–08–22
  7. By: Lindner, Ines; Strulik, Holger
    Abstract: This paper introduces the Small World model (Watts and Strogatz, Nature, 1998) into the theory of economic growth and investigates how increasing economic integration affects firm size and effciency, norm enforcement, and aggregate economic performance. When economic integration is low and local connectivity is high, informal norms control entrepreneurial behavior and more integration mainly improves search for effcient investment opportunities. At a higher level of economic integration neighborhood enforcement deteriorates and formal institutions are needed to keep entrepreneurs in check. A gradual take-off to perpetual growth is explained by a feedback effect from investment to the formation of long-distance links and the diffusion of knowledge. If formal institutions are weak, however, the economy does not take off but stagnates at an intermediate income level. Structurally, the equilibrium of stagnation differs from balanced growth by the presence of relatively many small firms of low productivity.
    Keywords: modernization, economic integration, firm size, norms, networks, knowledge spillovers, growth
    JEL: O10 O40 L10 L14 Z13
    Date: 2011–08
  8. By: Ghosh, , Swati R.; Sugawara, Naotaka; Zalduendo, Juan
    Abstract: This paper examines the factors that determine banking flows from advanced economies to emerging markets. In addition to the usual determinants of capital flows in terms of global push and local pull factors, it examines the role of bilateral factors, such as growth differentials and economic size, as well as contagion factors and measures of the depth in financial interconnectedness between lenders and borrowers. The analysis finds profound differences across regions. In particular, in spite of the severe impact of the global financial crisis, banking flows in emerging Europe stand out as a more stable region than is the case in other developing regions. Assuming that the determinants of banking flows remain unchanged in the presence of structural changes, the authors use these results to explore the short-term implications of Basel III capital regulations on banking flows to emerging markets.
    Keywords: Debt Markets,Banks&Banking Reform,Emerging Markets,Access to Finance,Economic Theory&Research
    Date: 2011–08–01
  9. By: Schimke, Antje; Brenner, Thomas
    Abstract: This paper examines the time structure of the effects of R&D activities on firm growth. The main questions are whether R&D activities come together with firms' growth in the subsequent periods and how this relationship depends on other characteristics of the firms, such as size and industry. In addition, we study the relationship between R&D effects and the autocorrelation dynamics of firm growth. We use firm level data of 1000 European companies with details on R&D investments in 2003 to 2006. A regression approach is applied with a linear model taking into account R&D activities at points in time and autocorrelation dynamics of firm growth. We find that R&D has, on average, a positive effect on firm growth, but the effect and its temporal structure strongly depends on firm size and industry. --
    Keywords: Firm growth,R&D activities,firm size,industry,autocorrelation,time gap,temporal structure
    Date: 2011
  10. By: Grossmann, Volker; Steger, Thomas M.; Trimborn, Timo
    Abstract: Previous research on optimal R&D subsidies has focussed on the long run. This paper characterizes the optimal time path of R&D subsidization in a semi-endogenous growth model, by exploiting a recently developed numerical method. Starting from the steady state under current R&D subsidization in the US, the R&D subsidy should significantly jump upwards and then slightly decrease over time. There is a negligible loss in welfare, however, from immediately setting the R&D subsidy to its optimal long run level, compared to the case where the dynamically optimal policy is implemented. --
    Keywords: R&D subsidy,transitional dynamics,semi-endogenous growth,welfare
    JEL: H20 O30 O40
    Date: 2011
  11. By: Romain Bouis; Romain Duval; Fabrice Murtin
    Abstract: This paper analyses the policy and institutional determinants of long-run economic growth for a sample of OECD and non-OECD countries, with two objectives. First, it assesses the extent to which the main findings from growth regressions covering industrial countries are robust to a larger sample covering lower-income OECD and non-OECD countries. Confirmation is found from pooled mean group estimates for the larger sample of countries that long-run GDP per capita levels are increased inter alia by education policies, trade openness, R&D expenditures and policy frameworks that are conducive to low inflation, although the estimated effect of education is implausibly large. Second, the paper proposes a new growth regression framework that explicitly models technology diffusion and allows exploring the growth effects of a wider set of policies and institutions, while alleviating some of the constraints of the pooled mean group estimator. Under this approach, the estimated return to education is more in line with available evidence from microeconomic studies. Regulatory barriers to entrepreneurship, explicit barriers to trade and – especially – patent rights protection appear to be fairly robust determinants of long-run cross-country differences in technology. Some other policies and institutions such as trade liberalisation are found to speed up technology convergence. There is limited evidence here that the effects of policies and institutions vary depending on countries’ level of development. These findings are subject to the usual limitations of growth regression analysis.<P>Les déterminants politiques et institutionnels de la croissance économique au sein des économies OCDE et non OCDE : nouveaux résultats à partir d'équations de croissance<BR>Cet article analyse les déterminants politiques et institutionnels de la croissance économique de long terme pour un échantillon de pays membres et non membres de l’OCDE avec deux objectifs. Premièrement, il évalue dans quelle mesure les principaux résultats de régressions couvrant des pays industrialisés sont robustes à un échantillon plus large couvrant les pays de l’OCDE à bas revenus et des pays non membres. Les résultats d’estimations en pooled mean group sur l’échantillon élargi de pays confirment que la croissance de long terme du PIB par tête augmente notamment avec les politiques d’éducation, l’ouverture aux échanges commerciaux, les dépenses en R-D et les structures politiques associées à un faible niveau d’inflation, bien que l’estimation élevée de l’effet de l’éducation soit peu plausible. Deuxièmement, le papier propose un nouveau cadre de régressions de croissance qui modélise de façon explicite la diffusion technologique et permet d’explorer les effets sur la croissance d’un ensemble plus vaste de politiques et d’institutions, tout en allégeant certaines des contraintes de l’estimateur pooled mean group. Sous cette approche, le rendement estimé de l’éducation est davantage en accord avec les estimations provenant d’études microéconomiques. Les barrières réglementaires à l’entreprenariat, les barrières explicites aux échanges commerciaux et surtout, la protection des droits sur les brevets apparaissent comme des déterminants assez robustes des différences technologiques de long terme entre pays. D’autres politiques et institutions, telles que la libéralisation des échanges commerciaux, accélèrent la convergence technologique. Il existe une évidence limitée en faveur d’effets différents des politiques et des institutions suivant le niveau de développement des pays. Ces résultats sont soumis aux limites habituelles de l’analyse en régressions de croissance.
    Keywords: panel data, policy and institutions, economic growth, croissance économique, données de panel, politiques et institutions
    JEL: N10 O40 O47
    Date: 2011–02–14
  12. By: Robert J. Barro; José F. Ursua
    Abstract: The potential for rare macroeconomic disasters may explain an array of asset-pricing puzzles. Our empirical studies of these extreme events rely on long-term data now covering 28 countries for consumption and 40 for GDP. A baseline model calibrated with observed peak-to-trough disaster sizes accords with the average equity premium with a reasonable coefficient of relative risk aversion. High stock-price volatility can be explained by incorporating time-varying long-run growth rates and disaster probabilities. Business-cycle models with shocks to disaster probability have implications for the cyclical behavior of asset returns and corporate leverage, and international versions may explain the uncovered-interest-parity puzzle. Richer models of disaster dynamics allow for transitions between normalcy and disaster, bring in post-crisis recoveries, and use the full time series on consumption. Potential future research includes applications to long-term economic growth and environmental economics and the use of stock-price options and other variables to gauge time-varying disaster probabilities.
    JEL: E01 E44 G12 G15
    Date: 2011–08

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