nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒09‒05
ten papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Effects of Growth and Volatility in Public Expenditures on Economic Growth: Theory and Evidence By Liutang Gong; Heng-fu Zou
  2. Financial Instability - a Result of Excess Liquidity or Credit Cycles? By Christian Heebøll-Christensen
  3. A Further Examination of the Export-Led Growth Hypothesis By Christian Dreger; Dierk Herzer
  4. The International Crisis and Latin America: Growth Effects and Development Strategies By Vittorio Corbo; Klaus Schmidt-Hebbel
  5. Romes without Empires: Urban Concentration,Political Competition, and Economic Growth By Cem Karayalcin; Mehmet Ali Ulubasoglu
  6. Managing Capital Inflows: The Role of Capital Controls and Prudential Policies By Mahvash S. Qureshi; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon
  7. International Reserves and the Global Financial Crisis By Kathryn M.E. Dominguez; Yuko Hashimoto; Takatoshi Ito
  8. Polarization, inequality and growth: The Indian experience By Sripad Motiram; Nayantara Sarma
  9. Bank Relationships, Business Cycles, and Financial Crises By Galina Hale
  10. Institutions and growth: a developing country case study By Luciano Nakabashi; Adolfo Sachsida; Ana Elisa Gonçalves Pereira

  1. By: Liutang Gong (Guanghua School of Management, Peking University; Institute for Advanced Study, Wuhan University); Heng-fu Zou (Guanghua School of Management, Peking University; Institute for Advanced Study, Wuhan University; Development Research Group, The World Bank)
    Abstract: This paper sets up a theoretical model linking the growth rate of the economy to the growth rate and volatility of different government expenditures. On a theoretical basis, it is found that volatility in government spending can be positively or negatively associated with economic growth depending on the intertemporal elasticity in consumption. On an empirical basis, it is rather surprising to find no association between growth in capital expenditure and output growth, whereas growth in current expenditure seems to stimulate output growth. In particular, growth in transportation and communication seems to have a negative effect on output growth. It is also very interesting to find that the rises in the volatility in the growth of general public services, transportation, and communication have a positive effect on output growth.
    Keywords: Public expenditures, Volatility, Economic growth
    JEL: E62 I00 H5 O4
    Date: 2011
  2. By: Christian Heebøll-Christensen (Department of Economics, University of Copenhagen)
    Abstract: This paper compares the financial destabilizing effects of excess liquidity versus credit growth, in relation to house price bubbles and real economic booms. The analysis uses a cointegrated VAR model based on US data from 1987 to 2010, with a particulary focus on the period preceding the global financial crisis. Consistent with monetarist theory, the results suggest a stable money supply-demand relation in the period in question. However, the implied excess liquidity only resulted in financial destabilizing effect after year 2000. Meanwhile, the results also point to persistent cycles of real house prices and leverage, which appear to have been driven by real credit shocks, in accordance with post-Keynesian theories on financial instability. Importantly, however, these mechanisms of credit growth and excess liquidity are found to be closely related. In regards to the global financial crisis, a prolonged credit cycle starting in the mid-1990s - and possibly initiated subprime mortgage innovations - appears to have created a long-run housing bubble. Further fuelled by expansionary monetary policy and excess liquidity, the bubble accelerated in period following the dot-com crash, until it finally burst in 2007.
    Keywords: financial instability; housing bubbles; credit view; money view; cointegrated VAR model; impulse response analysis
    JEL: C32 E51 E44 G21
    Date: 2011–08
  3. By: Christian Dreger; Dierk Herzer
    Abstract: This paper challenges the common view that exports generally contribute more to GDP growth than a pure change in export volume, as the export-led growth hypothesis predicts. Applying panel cointegration techniques to a production function with non-export GDP as the dependent variable, we find for a sample of 45 developing countries that: (i) exports have a positive short-run effect on non-export GDP and vice versa (short-run bidirectional causality), (ii) the long-run effect of exports on nonexport output, however, is negative on average, but (iii) there are large differences in the long-run effect of exports on non-export GDP across countries. Cross-sectional regressions indicate that these cross-country differences in the long-run effect of exports on non-export GDP are significantly negatively related to cross-country differences in primary export dependence and business and labor market regulation. In contrast, there is no significant association between the growth effect of exports and the capacity of a country to absorb new knowledge.
    Keywords: Export-led growth, Developing countries, Panel cointegration
    JEL: F43 O11 C23
    Date: 2011
  4. By: Vittorio Corbo; Klaus Schmidt-Hebbel
    Abstract: Latin America has been strongly affected by the international crisis and recession since late 2008. In comparison to historical experience, how has Latin America coped with the global crisis, which has been the role of different transmission mechanisms, and how have the region’s structural and policy conditions affected its sensitivity to foreign shocks? Moreover, what policies can protect the region better from world crises and shocks, and to which extent should it rely on a strategy of close trade and financial integration into a world economy punctuated by shocks and crises? This paper addresses the latter questions in three steps. First, by assessing empirically the sensitivity of growth in the region’s seven major economies during 1990-2009 to large number of structural and cyclical factors, based on high-frequency panel-data estimations. Second, by using the latter results to decompose the amplitude of GDP reductions in both recessions according to the individual and combined contribution of the different growth factors. Third, to derive the main implications of the results for the choice of macroeconomic regimes and development strategies.
    Keywords: Growth, Macroeconomic adjustment, Latin America
    JEL: O47 E6 O54
    Date: 2011–08
  5. By: Cem Karayalcin (Department of Economics, Florida International University); Mehmet Ali Ulubasoglu (Faculty of Business and Law, Deakin University, Victoria 3125, Australia)
    Abstract: Many developing economies are characterized by the dominance of a super metropolis. Taking historical Rome as the archetype of a city that centralizes political power to extract resources from the rest of the country, we develop two models of rent-seeking and expropriation which illustrate di?erent mechanisms that relate political competition to economic outcomes. The "voice" model shows that rent-seeking by different interest groups (localized in di?erent specialized cities/regions) will lead to low investment and growth when the number of such groups is small. The "exit" model allows political competition among those with political power (to tax or expropriate from citizens) over a footloose tax base. It shows that when this power is centralized in relatively few urban nodes, tax rates would be higher and growth rates lower. Our empirical work exploits the connection between urban wealth (with the political power it affords) and national soccer championships. By using a cross-country data set for 103 countries for the period 1960-99, we ?nd strong and robust evidence that countries with higher concentrations in urban wealth¨Cas proxied by the number of di?erent cities with championships in national soccer leagues¨Ctend to have lower long-run growth rates.
    Date: 2011–08
  6. By: Mahvash S. Qureshi; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon
    Abstract: We examine whether macroprudential policies and capital controls can contribute to enhancing financial stability in the face of large capital inflows. We construct new indices of foreign currency (FX)-related prudential measures, domestic prudential measures, and financial-sector capital controls for 51 emerging market economies over the period 1995–2008. Our results indicate that both capital controls and FX-related prudential measures are associated with a lower proportion of FX lending in total domestic bank credit and a lower proportion of portfolio debt in total external liabilities. Other prudential policies appear to help restrain the intensity of aggregate credit booms. Experience from the global financial crisis suggests that prudential and capital control policies in place during the boom seem to have enhanced economic resilience during the bust.
    JEL: F21 F32
    Date: 2011–08
  7. By: Kathryn M.E. Dominguez; Yuko Hashimoto; Takatoshi Ito
    Abstract: This study examines whether pre-crisis international reserve accumulations, as well as exchange rate and reserve policy decisions made during the global financial crisis, can help to explain cross-country differences in post-crisis economic performance. Our approach focuses not only on the total stock of official reserves held by countries, but also on the decisions by governments to purchase or sell reserve assets during the crisis period. We introduce new data made available through the IMF Special Data Dissemination Standard (SDDS) Reserve Template, which allow us to distinguish interest income and valuation changes in the stock of official reserves from the actively managed component of reserves. We use this novel data to gauge how (and whether) reserve accumulation policies influenced the economic and financial performance of countries during and after the global crisis. Our findings support the view that higher reserve accumulations prior to the crisis are associated with higher post-crisis GDP growth.
    JEL: F3 F31 F32 F33 F41
    Date: 2011–08
  8. By: Sripad Motiram (Indira Gandhi Institute of Development Research); Nayantara Sarma (Indira Gandhi Institute of Development Research)
    Abstract: We analyze polarization in India roughly in the past two and half decades using consumption expenditure data. We show that polarization has increased sharply since the 1990s, reversing the earlier trend. On multidimensional polarization, we show that several pre-existing cleavages (caste, rural-urban, state, region) have accentuated. Overall, our results suggest that the high growth that India has been witnessing in recent years and the pro-market reforms initiated since 1990s have been associated with widening disparities. Comparing polarization and inequality, we find similarities, but also some differences. Our results therefore underscore the importance of studying polarization as distinct from traditional inequality.
    Keywords: Polarization; Inequality; Growth in India
    JEL: D31 D63
    Date: 2011–06
  9. By: Galina Hale
    Abstract: The importance of information asymmetries in the capital markets is commonly accepted as one of the main reasons for home bias in investment. We posit that effects of such asymmetries may be reduced through relationships between banks established through bank-to-bank lending and provide evidence to support this claim. To analyze dynamics of formation of such relationships during 1980-2009 time period, we construct a global banking network of 7938 banking institutions from 141 countries. We find that recessions and banking crises tend to have negative effects on the formation of new connections and that these effects are not the same for all countries or all banks. We also find that the global financial crisis of 2008-09 had a large negative impact on the formation of new relationships in the global banking network, especially by large banks that have been previously immune to effects of banking crises and recessions.
    JEL: F34 F36
    Date: 2011–08
  10. By: Luciano Nakabashi (Universidade Federal do Paraná); Adolfo Sachsida (IPEA e CNPq); Ana Elisa Gonçalves Pereira (Universidade Federal do Paraná)
    Abstract: The Brazilian municipalities show an enormous inequality on its development level. Even within the states considered relatively prosperous, there are huge internal disparities on income levels. The richest Brazilian municipality's GDP per capita is about 190 times greater than the poorest municipality's, according to IBGE (2000) database. A possible explanation for this phenomenon relies on institutional theory. Many theoretical and empirical studies, mainly based on cross-country data, emphasize the role played by institutions on the determination of long run development. Nevertheless, there still is little research concerning the income differences within the national territory and its connection to institutional quality. The literature points out that institutions matter for the level of economic development because of their effects on political power distribution, generation of economic opportunities, innovation, human capital accumulation, and so on. Based on this assumption, the present study main goal is to analyze the effects of Brazilian municipalities' institutional quality on their GDP per capita levels. The results indicate that institutions are relevant and its importance is greater for large municipalities. On the other hand, human capital human capital is more important to small municipalities. To address the endogeneity problem inherent to the relationship between institutions and development, we employ the 2SLS method.
    Keywords: institutions, income level, brazilian municipalities
    JEL: C13 O11
    Date: 2011

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