nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒10‒22
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Relationship between inflation and economic growth in Azerbaijani economy: is there any threshold effect? By Hasanov, Fakhri
  2. Capital Flows and Economic Growth in the Era of Financial Integration and Crisis, 1990-2010 By Joshua Aizenman; Yothin Jinjarak; Donghyun Park
  3. Foreign aid and economic growth in Ethiopia By Tadesse, Tasew
  4. Effect of financial development on agricultural growth in Pakistan: new extensions from bounds test to level relationships and granger causality tests By Shahbaz, Muhammad; Shabbir, Shahbaz Muhammad; Butt, Muhammad Sabihuddin
  5. Foreign direct investment-economic growth nexus: The role of domestic financial development in Portugal By Muhammad, Shahbaz; Nuno, Carlos Leitão; Summaira, Malik
  6. Legislative turnover, fiscal policy, and economic growth: evidence from U.S. state legislatures By Uppal, Yogesh; Glazer, Amihai
  7. Policy Brief - Financing Water Security for Economic Growth in Africa By AfDB
  8. Finance-dominated capitalism, re-distribution, household debt and financial fragility in a Kaleckian distribution and growth model By Hein, Eckhard
  9. Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change By Bishnu, Monisankar; Ghate, Chetan; Gopalakrishnan, Pawan
  10. Relationship between exports, imports, and economic growth in France: evidence from cointegration analysis and Granger causality with using geostatistical models By Amiri, Arshia; Gerdtham, Ulf-G
  11. Financial Sector Ups and Downs and the Real Sector: Big Hindrance, Little Help By Joshua Aizenman; Brian Pinto; Vladyslav Sushko
  12. Knowledge Growth and the Allocation of Time By Robert E. Lucas, Jr.; Benjamin Moll
  13. Stationarity, structural breaks, and economic growth in Mexico: 1895-2008 By Antonio E. Noriega; Cid Alonso Rodríguez-Pérez

  1. By: Hasanov, Fakhri
    Abstract: The study examines possibility of threshold effect of inflation on economic growth over the period of 2000-2009. Estimated threshold model indicates that there is a non-linear relationship between economic growth and inflation in the Azerbaijani economy and threshold level of inflation for GDP growth is 13 percent. Below threshold level inflation has statistically significant positive effect on GDP growth, but this positive relationship becomes negative one when inflation exceeds 13 percent. Results of the study may be useful for monetary policymakers in terms of keeping inflation below the threshold level of 13 percent to prevent its negative effect on economic growth.
    Keywords: Azerbaijani Economy; Inflation; Economic Growth; Gross Fixed Capital Formation; Threshold Level
    JEL: C51 E31
    Date: 2011–06
  2. By: Joshua Aizenman; Yothin Jinjarak; Donghyun Park
    Abstract: We investigate the relationship between economic growth and lagged international capital flows, disaggregated into FDI, portfolio investment, equity investment, and short-term debt. We follow about 100 countries during 1990-2010 when emerging markets became more integrated into the international financial system. We look at the relationship both before and after the global crisis. Our study reveals a complex and mixed picture. The relationship between growth and lagged capital flows depends on the type of flows, economic structure, and global growth patterns. We find a large and robust relationship between FDI – both inflows and outflows – and growth. The relationship between growth and equity flows is smaller and less stable. Finally, the relationship between growth and short-term debt is nil before the crisis, and negative during the crisis.
    JEL: F21 F32 F43
    Date: 2011–10
  3. By: Tadesse, Tasew
    Abstract: Abstract The study has examined the impact of foreign aid on investment and economic growth in Ethiopia over the period 1970 to 2009 using multivariate cointegration analysis. The empirical result from the investment equation shows that aid has a significant positive impact on investment in the long run. On the other hand, volatility of aid by creating uncertainty in the flow of aid has a negative influence on domestic capital formation activity. Foreign aid is effective in enhancing growth. However, the aid-policy interaction term has produced a significant negative effect on growth implying that bad policies can constrain aid effectiveness. The growth equation further revealed that rainfall variability has a significant negative impact on economic growth as the economy. This study indicated also that the country has no problem of capacity constraint as to the flow of foreign aid.
    Keywords: foreign aid; policy; economic growth; cointegration; VECM; Ethiopia
    JEL: F35 C22 F43
    Date: 2011–07–02
  4. By: Shahbaz, Muhammad; Shabbir, Shahbaz Muhammad; Butt, Muhammad Sabihuddin
    Abstract: This study investigates the relationship between financial development and agriculture growth employing Cobb-Douglas function which incorporates financial development as an important factor of production for the period 1971-2011. The ARDL bounds testing approach to cointegration is applied to examine long run relationship between the variables. The direction of causality is detected by VACM Granger causality test and robustness of causality results is tested through innovative accounting approach (IAA). Our findings confirm that the variables are cointegrated for equilibrium long run relationship between agriculture growth, financial development, capital and labor. The results indicate that financial development has a positive effect on agricultural growth. This implies that financial development plays its significant role in stemming agricultural production and hence agricultural growth. The capital use in the agriculture sector also contributes to the agricultural growth. The Granger causality analysis reveals bidirectional causality between agricultural growth and financial development. The robustness of these results is confirmed by innovative accounting approach (IAA). This study has important policy implications for policy making authorities to stimulate agricultural growth by improving the efficiency of financial sector.
    Keywords: Agriculture Growth; Financial Development; Cointegration
    JEL: Q14
    Date: 2011–10–04
  5. By: Muhammad, Shahbaz; Nuno, Carlos Leitão; Summaira, Malik
    Abstract: The aim of present paper is to examine the role of financial development on FDI-Growth nexus using annual data over the period of 1975-2008. The results show that financial development is playing its role well but not satisfactory. This study will provide new guidelines for policy making authorities for Portuguese's economy. The manuscript applies the unrestricted error correction model (ECM) estimator advanced by Inder (1993) while ARDL bounds testing approach is employed to find cointegration among variables. Stationarity issue is investigated by Ng-Perron unit root test. The results show that financial development stimulates economic growth for the case of Portugal. Foreign direct investment also good promoter of economic growth while investment in public capital stock is contributing more as compared to financial development and foreign direct investment. Inflation declines economic growth.
    Keywords: Foreign Direct Investment; Growth; Cointegration; Portugal
    JEL: B22
    Date: 2011–10–05
  6. By: Uppal, Yogesh; Glazer, Amihai
    Abstract: An examination of how increased turnover among legislators in the fifty U.S. states affects fiscal policy and economic growth finds that it makes legislators short-sighted. Turnover increases the size of government by increasing the shares of both total spending and taxes in income. In particular, turnover increases capital expenditure and income taxes, both of which may cause long-run distortions in the economy. Further, increased turnover, by resulting in inefficient fiscal policy, reduces long-term economic growth.
    Keywords: Government size; State finances; Political competition; Legislative turnover; Composition of spending; short-sighted behavior
    JEL: H54 H20 H72 H30 H24 H71 H53 H40 H11 H51 H52
    Date: 2011–10
  7. By: AfDB
    Date: 2011–10–13
  8. By: Hein, Eckhard
    Abstract: In a Kaleckian distribution and growth model with workers’ debt we examine the short- and long-run effects of three stylized facts of ‘finance-dominated capitalism’: a fall in animal spirits of the firm sector with respect to real investment in capital stock, re-distribution of income at the expense of the wage share, and increasing lending of rentiers to workers for consumption purposes. In particular, we specify the conditions for long-run stability of the workers’ debt-capital ratio. We thus identify the threshold for this ratio to turn unstable causing increasing financial fragility and finally financial crisis due to systemic stock-flow or stock-stock dynamics.
    Keywords: Finance-dominated capitalism; distribution; household debt; financial fragility; growth; Kaleckian model
    JEL: E25 E12 O41 E22 E21
    Date: 2011–10
  9. By: Bishnu, Monisankar; Ghate, Chetan; Gopalakrishnan, Pawan
    Abstract: We construct a model of endogenous investment specific techological change in which the stock of public capital influences the real price of capital goods. We show that the growth and welfare maximizing tax rates coincide in the planned economy. When factor income taxes finance public investment infintely many tax-subsidy combinations can decentralize the planner's allocations. The optimal capital income tax can be positive in this environment. We then augment the model to incorporate administrative costs. A unique combination of factor income taxes now decentralizes the planner's allocations. A simple calibration exercise suggests that changes in factor income taxes does not cause a significant change in the optimal growth rate or welfare. Our framework broadens the environment in which investment specific technological change occurs, and characterizes the role of optimal factor income taxation in raising long run growth and welfare.
    Keywords: Investment Specific Technological Change; Endogenous Growth; Capital Income Taxation; Public Policy; Administrative Costs
    JEL: E2 H2 E6 O4
    Date: 2011–10–14
  10. By: Amiri, Arshia; Gerdtham, Ulf-G
    Abstract: This paper introduces a new way of investigating linear and nonlinear Granger causality between exports, imports and economic growth in France over the period 1961-2006 with using geostatistical models (kiriging and inverse distance weighting). Geostatistical methods are the ordinary methods for forecasting the locations and making map in water engineerig, environment, environmental pollution, mining, ecology, geology and geography. Although, this is the first time which geostatistics knowledge is used for economic analyzes. In classical econometrics there do not exist any estimator which have the capability to find the best functional form in the estimation. Geostatistical models investigate simultaneous linear and various nonlinear types of causality test, which cause to decrease the effects of choosing functional form in autoregressive model. This approach imitates the Granger definition and structure but improve it to have better ability to investigate nonlinear causality. Results of both VEC and Improved-VEC (with geostatistical methods) are similar and show existance of long run unidirectional causality from exports and imports to economic growth. However the F-statistic of improved-VEC is larger than VEC indicating that there are some exponential and spherical functions in the VEC structure instead of the linear form.
    Keywords: Granger causality; Exports; Imports; Economic growth; Geostatistical model; Kiriging; Inverse distance weighting; Vector auto-regression; France
    JEL: F17 F1 C1
    Date: 2011–10–10
  11. By: Joshua Aizenman; Brian Pinto; Vladyslav Sushko
    Abstract: We examine how financial expansion and contraction cycles affect the broader economy through their impact on 8 real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contractions and magnifying and mitigating factors. Overall, the construction sector is the most responsive to financial sector growth, with a number of others such as government, public utilities, and transportation also exhibiting significant sensitivity to lagged financial sector growth. Sharp fluctuations in the financial sector have asymmetric effects, with the majority of real sectors adversely affected by contractions but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively by the financial openness channel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impact during sharp financial contractions. Both effects are magnified during particularly large financial contractions (with coefficients on interaction terms 2 to 3 times greater than when all contractions are considered). Consequent upon a financial contraction, the most severe real sector contractions occur in countries with high financial openness, relative predominance of construction, manufacturing, and wholesale and retail sectors, and low international reserves. Finally, we find that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of “up by the stairs, down by the elevator dynamics.”
    JEL: F15 F31 F36 F4
    Date: 2011–10
  12. By: Robert E. Lucas, Jr.; Benjamin Moll
    Abstract: We analyze a model economy with many agents, each with a different productivity level. Agents divide their time between two activities: producing goods with the production-related knowledge they already have, and interacting with others in search of new, productivity-increasing ideas. These choices jointly determine the economy’s current production level and its rate of learning and real growth. Individuals’ time allocation decisions depend on the knowledge distribution because the productivity levels of others determine their own chances of improving their productivities through search. The time allocations of everyone in the economy in turn determine the evolution of its knowledge distribution. We construct the balanced growth path for this economy, thereby obtaining a theory of endogenous growth that captures in a tractable way the social nature of knowledge creation. We also study the allocation chosen by an idealized planner who takes into account and internalizes the external benefits of search, and tax structures that implement an optimal solution. Finally, we provide two examples of alternative learning technologies, as concrete illustrations of other directions that might be pursued.
    JEL: O0 O15
    Date: 2011–10
  13. By: Antonio E. Noriega; Cid Alonso Rodríguez-Pérez
    Abstract: This paper shows that the evolution of the level of Mexico real and real per capita output between 1895 and 2008 can be adequately described through a trendstationary model, affected by 4 structural breaks, which occurred at dates that seem to coincide with domestic institutional arrangements, wars, and financial and economic crises. These changes are modeled through logistic smooth transition functions, in which transition periods are endogenously estimated. In terms of growth rates, our results indicate that for Mexico real and real per capita GDP, there are four stationary growth paths, separated by three transition periods. For instance, for real GDP we identify the following stationary growth paths: 1895-1924, 1935-1952, 1956-1978, and 1989-2008, separated by three transition periods: 1925-1934, 1953-1955, and 1979-1988.
    Keywords: Gross domestic product, economic growth, stationarity, unit root, structural break, logistic function, smooth transition.
    JEL: C12 C13 C15 C22 O47 O54
    Date: 2011–10

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