nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒09‒22
fifteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Growth and Productivity: the role of Government Debt By António Afonso; João Tovar Jalles
  2. Cross-country growth empirics and model uncertainty: An overview By Ulaşan, Bülent
  3. "Agglomeration, Inequality and Economic Growth: Cross-section and panel data analysis" By David Castells
  4. Implementation of technological breakthroughs at sector level and the technology-bias By Stijepic, Denis; Wagner, Helmut
  5. No Country for Old Men: Aging Dictators and Economic Growth By Richard Jong-A-Pin; Jochen O. Mierau
  6. R&D-based Growth in the Post-modern Era By Holger Strulik; Klaus Prettner; Alexia Prskawetz
  7. A further examination of the export-led growth hypothesis By Dreger, Christian; Herzer, Dierk
  8. The balance of payments constrained growth rate and the natural rate of growth: new empirical evidence By Lanzafame, Matteo
  9. Economic Policies and FDI Inflows to Emerging Market Economies By Elif Arbatli
  10. Service Export sophistication and Europe's new growth model By Gable, Susanna Lundstrom; Mishra, Saurabh
  11. The social cost of carbon on an optimal balanced growth path By Kögel, Tomas
  12. Learning From Stock Prices and Economic Growth By Peress, Joël
  13. Altruism, Education Subsidy and Growth By Mauricio Armellini; Parantap Basu
  14. Industrial development, agricultural growth, urbanization and environmental Kuznets curve in Pakistan By Muhammad , Anees; Ishfaq, Ahmed
  15. Shocks, Financial Dependence, and Efficiency: Evidence from U.S. and Canadian Industries By Marcello M. Estevão; Tiago Severo

  1. By: António Afonso; João Tovar Jalles
    Abstract: We use a panel of 155 countries to assess the links between growth, productivity and government debt. Via growth equations we assess simultaneity, endogeneity, cross-section dependence, nonlinearities, and threshold effects. We find a negative effect of the debt ratio. For the OECD, the higher the debt maturity the higher economic growth; financial crisis are detrimental for growth; fiscal consolidation promotes growth; and higher debt ratios are beneficial to TFP growth. The growth impact of a 10% increase in the debt ratio is -0.2% (0.1%) respectively for countries with debt ratios above (below) 90% (30%), and an endogenous debt ratio threshold of 59% can be derived.
    Keywords: government debt, crises, panel analysis. Classification-C23, E62, H50.
    Date: 2011–07
  2. By: Ulaşan, Bülent
    Abstract: The aim of this paper is to provide an overview of empirical cross-country growth literature. The paper begins with describing the basic framework used in recent empirical cross-country growth research. Even though this literature was mainly inspired by endogenous growth theories, the neoclassical growth model is still the workhorse for cross-country growth empirics. The second part of the paper emphasises model uncertainty, which is indeed immense but generally neglected in the empirical cross-country growth literature. The most outstanding feature of the literature is that a large number of factors have been suggested as fundamental growth determinants. Together with the small sample property, this leads to an important problem: model uncertainty. The questions which factors are more fundamental in explaining growth dynamics and hence growth differences are still the subject of academic research. Recent attempts based on general-to-specific modeling or model averaging are promising but have their own limits. Finally, the paper highlights the implications of model uncertainty for policy evaluation. --
    Keywords: Economic growth,convergence,cross-country growth,regression,model uncertainty,policy evaluation
    JEL: O40 O47
    Date: 2011
  3. By: David Castells (Faculty of Economics, University of Barcelona)
    Abstract: The effects of inequality on economic growth depend on several factors. On one hand, they depend on the time horizon considered, on the initial level of income and on its initial distribution. But, on the other hand, as growth and inequality are also uneven across space, it also seems relevant to wonder how the effects of inequality on growth are related to the geographic agglomeration of economic activity. By introducing measures of urban concentration, this work analyzes how the effects of income inequality on economic growth depend not only on the level of development, and on the initial distribution of income, but are also affected by the process of concentration of economic activity at the urban level. By setting different econometric specifications, short from long-run effects are distinguished to then differentiate the effects of changes from the effects of levels of inequality. Results suggest that while inequality is a limiting factor for long-run growth, especially for low-income countries -consistent with previous literature-, increasing inequality, when associated with increasing concentration of economic activity at the urban level, is likely to enhance growth in the short and medium-run in those low-income countries.
    Keywords: Agglomeration, Urban concentration, Inequality, Growth JEL classification:O1, O4, R1
    Date: 2011–09
  4. By: Stijepic, Denis; Wagner, Helmut
    Abstract: Different goods are produced by different sectors in an economy. The fact that sectors use different production technologies is named technology-bias. The technology-bias is well documented and has important theoretical implications for economic growth and unemployment. We provide a theoretical model that explains the technology-bias and its development. We provide empirical evidence on the development of the technology-bias and explain this development by using our model-results. Last not least, we discuss the implications of our findings for the existing growth literature and structural change literature.
    Keywords: sector technology; implementation of technological progress; structural change; growth; multi-sector growth models
    JEL: O41 O39 O14
    Date: 2011–02–22
  5. By: Richard Jong-A-Pin; Jochen O. Mierau
    Abstract: This paper develops a model of the relationship between the age of a dictator and economic growth. In the model a dictator must spread the resources of the economy over his reign but faces mortality and political risk. The model shows that if the time horizon of the dictator decreases, either due to an increase of mortality risk or political risk, the economic growth rate decreases. The model predictions are supported by empirical evidence based on a threeway fixed effects model including country, year and dictator fixed effects for a sample of dictators from 116 countries. These results are robust to sample selection, the tenure of dictators, the definition of dictatorship, and a broad set of economic growth determinants.
    Keywords: Aging, ,; economic growth; government performance; political instability; political leaders
    JEL: H11 O11 O43
    Date: 2011–09
  6. By: Holger Strulik; Klaus Prettner (Harvard Center for Population and Development Studies); Alexia Prskawetz (Vienna Institute of Demography)
    Abstract: Conventional R&D-based growth theory suggests that productivity growth is positively correlated with population size or population growth, an implication which is hard to see in the data. Here we integrate R&D-based growth into a unified growth setup with micro-founded fertility and schooling behavior. We then show how a Beckerian child quality-quantity trade-off explains why higher growth of productivity and income per capita are associated with lower population growth. The medium-run prospects for future economic growth - when fertility is going to be below replacement level in virtually all developed countries - are thus much better than predicted by conventional R&D-based growth theory.
    Keywords: R&D, unified growth theory, declining population, fertility, schooling, human capital, post-modern society.
    Date: 2011–08
  7. By: Dreger, Christian; Herzer, Dierk
    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 non-export output, however, is negative on average, but (iii) there are large differences in the longrun 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 nonexport 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
  8. By: Lanzafame, Matteo
    Abstract: This paper implements a panel approach to investigate the empirical relevance of ‘Thirlwall’s Law’, which states that long-run growth must be consistent with balance of payments (BOP) equilibrium and is, thus, determined on the demand side. Building on ARDL modelling, mean-group and pooled mean-group estimation methods, we use annual data over the 1960-2010 years for a panel of 22 OECD countries and find significant support for the ‘Law’. Next, we also explore empirically the hypothesis that the BOP-constrained growth rate (yb) must equal the natural (or potential) rate of growth (yn) and find that the data do not reject this hypothesis. Finally, we adopt a new approach, based on panel Granger-causality methods, to explore the direction of causality between yb and yn. The results indicate the existence of unidirectional long-run causality from yb to yn , thus reinforcing the view, embodied in the ‘Law’, that long-run growth is demand-determined and constrained by the BOP.
    Keywords: Balance of payments; endogenous growth; panel cointegration; pooled mean-group estimation; panel Granger-causality
    JEL: C23 O57 O40 F43
    Date: 2011–09
  9. By: Elif Arbatli
    Abstract: This paper investigates the determinants of FDI inflows to emerging market economies, concentrating on the effects of economic policies. The empirical analysis also addresses the role of external push factors and of political stability using a domestic conflict events database. The results suggest that lowering corporate tax rates and trade tariffs, adopting fixed or managed exchange rate policies and eliminating FDI related capital controls have played an important role. Domestic conflict events and political instability are found to have significant negative effects on FDI, which highlights the role of incluside policies to promote growth and avoid sudden stops of FDI inflows.
    Keywords: Capital inflows , Economic models , Economic policy , Emerging markets , Foreign direct investment , Group of seven ,
    Date: 2011–08–10
  10. By: Gable, Susanna Lundstrom; Mishra, Saurabh
    Abstract: Technology has changed the nature of service activities and made them more productive, tradable and fragmented in the global supply chain. Has Europe's growth been benefiting from the ongoing globalization of services? Services dominate growth in EU-15 countries and, to a lesser extent, in New Member States (NMS) and Accession (ACC) countries. Except in the ACC region, Europe has maintained specialization in service exports. Service productivity, tradability, and exports of modern services are high in EU-15, growing fast in NMS while at a lower pace in ACC. Service export sophistication is important for growth across the region, but especially in NMS.
    Keywords: Commodities,Public Sector Corruption&Anticorruption Measures,Housing&Human Habitats,Economic Theory&Research,Banks&Banking Reform
    Date: 2011–09–01
  11. By: Kögel, Tomas
    Abstract: This paper derives analytically the growth rate of the social cost of carbon (SSC) on an optimal balanced growth path. More specifically, the paper examines a deterministic Ramsey model of optimal economic growth with carbon emissions. In this model, restrictions on technology and preferences are imposed that guarantee optimal balanced growth, i.e., that guarantee an optimal path with constant and positive economic growth and a constant stock of carbon in the atmosphere. The paper exploits these restrictions to show that the growth rate of the SCC on the optimal balanced growth path is negative, provided the elasticity of marginal utility of consumption with respect to consumption is larger than or equal to one. There seems to be consensus in the literature that this latter requirement is fulfilled in reality. --
    Keywords: Climate change,sustainability,social cost of carbon
    JEL: D61 Q54
    Date: 2011
  12. By: Peress, Joël
    Abstract: A competitive stock market is embedded into a neoclassical growth economy to analyze the interplay between the acquisition of information about firms, its partial revelation through stock prices, capital allocation and income. The stock market allows investors to share their costly private signals in a cost-effective incentive-compatible way. It contributes to economic growth by raising total factor productivity, but its impact is only transitory. Several predictions on the evolution of real and financial variables are derived, including capital efficiency, total factor productivity, industrial specialization, wealth inequality, stock trading intensity, liquidity and return volatility.
    Keywords: asymmetric information; capital allocation; financial development; growth; learning; noisy rational expectations equilibrium; stock market
    JEL: G11 G14 O16
    Date: 2011–09
  13. By: Mauricio Armellini (Durham Business School); Parantap Basu (Durham Business School)
    Abstract: An optimal education subsidy formula is derived using an overlapping generations model with parental altruism. The model predicts that public education subsidy is greater in economies with lesser parental altruism because a benevolent government has to compensate for the shortfall in private education spending of less altruistic parents with a finite life. On the other hand, growth is higher in economies with greater parental altruism. Cross-country regressions using the World Values Survey for altruism lend support to our model predictions. The model provides insights about the reasons for higher education subsidy in richer countries.
    Date: 2011–01–01
  14. By: Muhammad , Anees; Ishfaq, Ahmed
    Abstract: The debate of environmental issues and their analysis is of vital interest for economic policies. Institutions are engaged in identifying and estimating the extent of environmental impact of determinants controllable via policy measures. Annual data from the on Carbon Dioxide emission, economic growth, consumption of energy, openness for foreign trade, urbanization, industrial growth and agriculture growth on Pakistan is used for 1971 to 2007. Augmented Vector Autoregression technique and cointegration analysis is implemented to test Granger causality. Gross domestic product significantly Granger causes emission of Carbon Dioxide and energy consumption. On the other hand emissions of CO2 affect economic growth, agriculture and industrial growth in the long run. It is also evident that energy consumption unidirectional Granger causes emission of Carbon Dioxide. Industrialization and urbanization bidirectional Granger causes each other. The results indicate the more careful industrial and energy policies to reduce emissions and control global warming.
    Keywords: Pakistan; Carbon Dioxide emission; Environment; Energy Consumption; Economic Growth; Foreign Trade
    JEL: C32 A12 O13 C22
    Date: 2011–09–17
  15. By: Marcello M. Estevão; Tiago Severo
    Abstract: The paper investigates how changes in industries’ funding costs affect total factor productivity (TFP) growth. Based on panel regressions using 31 U.S. and Canadian industries between 1991 and 2007, and using industries’ dependence on external funding as an identification mechanism, we show that increases in the cost of funds have a statistically significant and economically meaningful negative impact on TFP growth. This effect is, however, non-monotonic across sectors with different degrees of dependence on external finance. Our findings cannot be explained by either increasing returns to scale or factor hoarding, as results are not sensitive to controlling for industry size and our calculations account for changes in factor utilization. The paper presents a theoretical model that produces the observed non-monotonic effect of financial shocks on TFP growth and suggests that financial shocks distort the allocation of factors across firms even within an industry, thus reducing TFP growth.
    Keywords: Business cycles , Canada , Economic models , External shocks , Industrial sector , Productivity , United States ,
    Date: 2011–08–17

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