nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒10‒01
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Exports-led growth hypothesis in Pakistan: further evidence By Muhammad , Shahbaz; Pervaz , Azeem; Ahmad, Khalil
  2. Human Capital and Growth: Specification Matters By Sunde, Uwe; Vischer, Thomas
  3. Decisions on investment allocation in the post-Keynesian growth models By Araujo, Ricardo Azevedo; Teixeira, Joanílio Rodolpho
  4. Growth Volatility and the Structure of the Economy By Davide Fiaschi; Andrea Mario Lavezzi
  5. The Fogel Approach to Health and Growth By Dihai Wang; Heng-fu Zou
  6. Financial Deepening and Economic Growth in the European Transition Economies By Mirdala, Rajmund
  7. Institution of politically motivated policy certainty of government on economic growth: a study among major Indian states By Sarker, Debnarayan; Das, Debraj
  8. Optimal Growth with Heterogeneous Agents and the Twisted Turnpike: An Example By Robert Becker
  9. Measuring the impact of financial flows on macroeconomic variables: the case of Brazil after the 2008 crisis By Roberto Meurer
  10. The real effects of debt By Stephen Cecchetti; Madhusudan Mohanty; Fabrizio Zampolli
  11. Analysing Risk Management in Banks: Evidence of Bank Efficiency and Macroeconomic Impact By Awojobi, Omotola; Amel, Roya; Norouzi, Safoura
  12. International Recessions By Fabrizio Perri; Vincenzo Quadrini

  1. By: Muhammad , Shahbaz; Pervaz , Azeem; Ahmad, Khalil
    Abstract: The study considers the exports-led growth hypothesis using quarterly data over the period 1990-2008 in case of Pakistan. For this purpose, Ng-Perron unit root test, ARDL bounds testing approach to cointegration and error correction method (ECM) for short run dynamics have been applied. Our results indicate that exports are positively correlated with economic growth confirming the validity of exports-led growth hypothesis. Exchange rate depreciation decreases and real capital stock improves economic growth.
    Keywords: Exports; Economic Growth; ARDL Approach
    JEL: F1
    Date: 2011–09–04
  2. By: Sunde, Uwe (University of St. Gallen); Vischer, Thomas (University of St. Gallen)
    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 affects 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. Moreover, the effects are heterogeneous across countries with different levels of development. The results suggest that the effect of human capital is likely to be underestimated in empirical specifications that do not account for both channels. 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: 2011–09
  3. By: Araujo, Ricardo Azevedo; Teixeira, Joanílio Rodolpho
    Abstract: In this article the analysis developed by Feldman (1928) and Mahalanobis (1953) are incorporated to the Post-Keynesian Growth Model to consider the decisions of investment allocation on economic growth. By adopting this approach it is possible to study the interaction between distributive features and investment allocation which allows us to determine the rate of investment allocation according to the equilibrium decisions of investment and savings. Finally, an additional condition is added to the Post Keynesian Growth Model in order to fully characterise the equilibrium path in an extended version of this framework, where capital goods are also needed to produce capital goods.
    Keywords: Post-Keynesian growth model; structural change; multi-sector models
    JEL: E12 O41 E21
    Date: 2011–09
  4. By: Davide Fiaschi; Andrea Mario Lavezzi
    Abstract: The aim of the paper is twofold: i) to propose a methodology to compute the growth rate volatility of an economy, and ii) to investigate the relationship between growth volatility and economic development through the lenses of the structural characteristics of an economy. We study a large cross-section of countries in the period 1970-2009, controlling for the stability of the es- timates in two subperiods: 1970:1989 (Period I) and 1990:2009 (Period II). Our main findings are: i) the degree of trade openness has a destabilizing effect, while the degree of financial openness has not a significant effect; ii) the size of the public sector displays a U-shaped relationship with growth volatility, but only in Period II; iii) the level of financial development has a negative effect on growth volatility, but only in Period I. Therefore, the dominant policy orientations in the recent decades contained emphasis on potential sources of instability, e.g. on the increase in openness and on the reduction of the size of the public sector.
    Keywords: growth volatility, economic development, economic structure,nonparametric methods.
    JEL: O11 O40 C14 C21
    Date: 2011–01–06
  5. By: Dihai Wang (School of Economics, Fudan University); Heng-fu Zou (Research Department, World Bank)
    Abstract: According to Robert Fogel (1994a, 1994b), nutrition is the driving force for the increase in health human capital, which in turn has significantly promoted economic growth in the long run. In this paper, we take Fogel¡¯s finding to extend the standard Ramsey model by including the effect of consumption on nutrition and health human capital formation. It is demonstrated that there exist multiple equilibria in the modified Ramsey model with a subsistence level of consumption. That is to say, different countries may end up with different levels of long-run consumption, nutrition, health human capital, and physical capital.
    Keywords: Health Human Capital, Consumption, Economic Growth, Poverty Trap
    JEL: D99 E21 I12
    Date: 2011
  6. By: Mirdala, Rajmund
    Abstract: Various effects of the financial deepening came to the centre of academics as well as policy-makers discussions during last four decades especially in relation to the financial sector development. Together with financial liberalization and international financial integration economists focus their attention to the financial deepening especially due to its potential effects on the real economy. Perspective of the fast and sustainable economic growth at the end of the 1990s increased an attractiveness of the European transition economies (ETE) for the foreign investors that resulted in increased foreign capital inflows to ETE. International capital inflows (especially debt and portfolio capital flows) stimulate financial deepening through higher demand for financial services. As the underdeveloped financial markets obviously constrain domestic capital mobilization, the international financial integration is considered to be very useful vehicle in fostering financial sector advancement. One of the most discussed areas related to the overall effects of the financial deepening is a bi-directional relationship between financial development and economic growth. It is generally expected there is a positive effect of financial development on economic growth. On the other hand especially some country-specific institutional characteristics and different policies may significantly distort positive incentives of the financial deepening. In the paper we analyze the main aspects of the financial deepening in ten ETE in the period 2000-2010 using vector error correction model (VECM). In order to meet this objective we implement a multivariate cointegration methodology introduced by Johansen (1988, 1991) and Johansen and Juselius (1990) to estimate the relationships between financial depth indicators and real output in the selected group of countries. To find the order of integration of endogenous variables we test the time series for the unit root presence. In order to determine cointegrating (long-run) relationships, we follow a Johansen cointegration procedure to perform the trace test and maximum eigenvalue test. We also test the direction of the causality relationships between financial depth indicators and real output using linear Granger causality test. Using the estimated VEC model, the dynamic responses of the endogenous variables to the money stock, domestic bank deposits and domestic bank loans one standard deviation shocks are computed for each country from the group of ETE.
    Keywords: financial deepening; economic growth; vector error correction model; granger causality; impulse-response function
    JEL: G14 G15 O16 F43
    Date: 2011–06
  7. By: Sarker, Debnarayan; Das, Debraj
    Abstract: This paper theoretically tries to explore the impact of politically motivated policy certainty of a government guided by the norm of equality of income on economic growth and also tries to examine its empirical validity on major Indian states. This paper lends credence to the fact that politically motivated policy uncertainty among most of the major Indian states under this study has positive impact on their economic growth. This study suggests that the policy of attaining inclusive growth for Indian states should be formalized in such a way that equality in income distribution and economic growth should be attained simultaneously.
    Keywords: politically motivated policy certainty; major Indian states; income distribution; reproducible capital
    JEL: D31
    Date: 2011–01
  8. By: Robert Becker (Indiana University)
    Abstract: The dynamics of a welfare maximizing, heterogeneous agent, one sector optimal Ramsey model is analyzed assuming two agents, each with a distinct discount factor and log utility. Production is Cobb-Douglas. Explicit time varying policy functions are derived, one for each period. A Twisted Turnpike Property and eventually monotone dynamics are demonstrated to govern the evolution of the economy’s aggregate capital stock.
    Date: 2011–09
  9. By: Roberto Meurer (Universidade Federal de Santa Catarina)
    Abstract: The effects of changes in foreign portfolio investment flows on Brazilian GDP and investment during the financial crisis of 2008 are evaluated through impulse-response functions, parsimonious models, and out of sample forecasts. Impulse-response functions results show a positive relation between fixed income flows and GDP and investment, but this relation is not as strong between the real variables and equity flows, although these flows anticipate GDP and investment behavior. Expectations seem to have an important role in explaining GDP and investment, which also have an influence on flows. The reduced vulnerability of the Brazilian economy consequently lessened the effect of the crisis when compared with previous crisis episodes.
    Keywords: foreign portfolio investment, growth, investment, crisis, Brazil
    JEL: F32 E32 E22
    Date: 2011
  10. By: Stephen Cecchetti; Madhusudan Mohanty; Fabrizio Zampolli
    Abstract: At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.
    Keywords: growth, public debt, private debt, debt threshold, ageing
    Date: 2011–09
  11. By: Awojobi, Omotola; Amel, Roya; Norouzi, Safoura
    Abstract: The recent Global Economic meltdown triggered by the subprime mortgage crisis of United States in 2007 and its adverse effect on financial markets and participants in the financial industry worldwide have resulted in a capital management crisis in most financial institutions especially banks. This study is a case for the Nigerian banking industry, focusing on factors affecting risk management efficiency in banks. For empirical investigation, we employed Panel regression analysis taking a stratum of time series data and cross-sectional variants of macro and bank-specific factors for period covering 2003 to 2009. Result for panel regression indicates that risk management efficiency in Nigerian banks is not just affected by bank-specific factors but also by macroeconomic variables. This describes the pro-cyclicality of bank performance in the Nigerian banking sector. As it stands, the sufficiency of Basel principles for risk management is doubtful because asset quality varies with business cycles.
    Keywords: Risk management; Nigerian banks; capital adequacy; Basel; cyclicality
    JEL: E31 G31 G21
    Date: 2011–04–06
  12. By: Fabrizio Perri (University of Minnesota and Federal Reserve Bank of Minneapolis (email:; Vincenzo Quadrini (University of Southern California)
    Abstract: The 2008-2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions. Countries also experienced large and synchronized contractions in the growth of financial flows. In this paper we present a two-country model with financial markets frictions where credit-driven recessions can explain these features of the recent crisis. A credit contraction can emerge as a self-fulling equilibrium caused by pessi- mistic but fully rational expectations. As a result of the credit contraction, in a financially integrated world, countries experience large and, endogenously synchronized, declines in asset prices and economic activity ( international recessions).
    Date: 2011–09

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