nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒12‒13
seven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Does economic growth cause terrorism in Pakistan? By Muhammad, Shahbaz; Muhammad, Nasir Malik; Muhammad, Shahbaz Shabbir
  2. Education, Innovation, and Long-Run Growth By Katsuhiko Hori; Katsunori Yamada
  3. Can Asia Sustain an Export-Led Growth Strategy in the Aftermath of the Global Crisis? An Empirical Exploration By Razmi, Arslan; Hernandez, Gonzalo
  4. Fiscal Policy, Eurobonds and Economic Recovery: Some Heterodox Policy Recipes against Financial Instability and Sovereign Debt Crisis By Alberto Botta
  5. Infrastructure and Growth in Developing Asia. By Straub, Stéphane; Terada-Hagiwara, Akiko
  6. Economic performance and government size By António Afonso; João Tovar Jalles
  7. Natural gas consumption and economic growth: cointegration, causality and forecast error variance decomposition tests for Pakistan By Muhammad, Shahbaz; V G R , Chandran; Pervaiz, Azeem

  1. By: Muhammad, Shahbaz; Muhammad, Nasir Malik; Muhammad, Shahbaz Shabbir
    Abstract: This paper analyzes the relationship between terrorism and economic growth for Pakistan by incorporating capital and trade openness. We used the data from 1971-2010 and have applied ARDL bounds testing approach to cointegration to examine the long run relationship between the variables. The VECM Granger causality approach is used to detect the direction of causality between terrorism and economic growth. Our empirical results confirm the existence of long run relationship between economic growth and terrorism. The Granger causality analysis indicates bidirectional causality between terrorism and capital, trade openness and capital, and terrorism and trade openness. However, unidirectional causality is found running from economic growth to terrorism.
    Keywords: Terrorism; Economic Growth; Cointegration and Causality
    JEL: B22
    Date: 2011–11–20
  2. By: Katsuhiko Hori (Institute of Economic Research, Kyoto University); Katsunori Yamada (Institute of Social and Economic Research, Osaka University)
    Abstract: This study augments a second-generation Schumpeterian growth model to employ human capital explicitly. We clarify the general-equilibrium interactions of subsidy policies to R&D and human capital accumulation in a unified framework. Despite a standard intuition that subsidizing these growth-enhancing activities is always mutually growth promoting, we find asymmetric effects for subsidies on R&D and those on education. Our theoretical result of asymmetric policy effects provides an important empirical caveat that empirical researchers may find false negative relationships between education subsidies and the output growth rate, if they merely rely on the standard human capital model.
    Keywords: Schumpeterian growth model; human capital accumulation; subsidies
    JEL: O15 O32 O41
    Date: 2011–11
  3. By: Razmi, Arslan (Asian Development Bank Institute); Hernandez, Gonzalo (Asian Development Bank Institute)
    Abstract: Many developing countries have attempted to pursue the East Asian growth model in recent decades. This model is widely perceived to have been based on export-led growth. Given that developed countries are likely to grow at a slower rate and be less willing to run trade deficits in the post-financial-crisis world can this growth model be sustained? Using panel data for Asian countries, this paper contributes to addressing this question by distinguishing between different kinds of export- and tradable-led growth in order to more precisely identify the nature of growth in the pre-crisis decades.
    Keywords: export-led growth; tradable-led growth; global imbalances; industrialization; capital accumulation
    JEL: F43 O11 O53
    Date: 2011–12–05
  4. By: Alberto Botta (Department of Economics, University of Insubria, Italy)
    Abstract: In this paper, we propose a simple post-Keynesian model on the linkages between the financial and real side of an economy. We show how, according to the Minskyan instability hypothesis, financial variables, credit availability and asset prices in particular, may feedback each other and affect economic activity, possibly giving rise to intrinsically unstable economic processes. Through these destabilizing mechanisms, we also explain why governments intervention in the aftermath of the 2007 financial meltdown has been largely useless to restore financial tranquility and economic growth, but transformed a private debt crisis into a sovereign debt one. The paper ends up by looking at the long run and to the interaction between long-term growth potential and public debt sustainability. We explicitly consider the European economic context and the difficulties several EU members currently face to simultaneously support economic recovery and consolidate fiscal imbalances. We stress that: (i) financial turbulences may trigger permanent reductions in long-term growth potential and unsustainable public debt dynamics; (ii) strong institutional discontinuity such as EU financial assistance to member countries may prove to be the only way to restore growth and ensure long-run public debt sustainability.
    Keywords: post-Keynesian models, financial instability, debt sustainability, Eurobonds JEL Classification: E12, E44, H63
    Date: 2011–12
  5. By: Straub, Stéphane; Terada-Hagiwara, Akiko
    Date: 2011–02
  6. By: António Afonso (ISEG/UTL – Technical University of Lisbon, Department of Economics; UECE – Research Unit on Complexity and Economics; European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); João Tovar Jalles (University of Aberdeen, Business School, Edward Wright Building, Dunbar Street, AB24 3QY, Aberdeen, UK and European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth. JEL Classification: C10, C23, H11, H30, O40.
    Keywords: Growth, institutions, fiscal rules, pooled mean group, common correlated effects.
    Date: 2011–11
  7. By: Muhammad, Shahbaz; V G R , Chandran; Pervaiz, Azeem
    Abstract: This paper examines the relationship between natural gas consumption and economic growth in Pakistan using a multivariate model by including capital and labor as the control variables for the periods of 1972-2009. The results of the ARDL bounds testing indicate the presence of cointegration among the variables. The estimated long-run impact of gas consumption (0.49) on economic growth is greater than other factor inputs suggesting that energy is a critical driver of production and growth in Pakistan. Furthermore, the results of causality test and variance decomposition analysis suggest a unidirectional causality running from natural gas consumption to economic growth. Gas being the primary source of energy in Pakistan, the implications of this study is that natural gas conservation policies could harm growth and, therefore, requires the policy makers to improve the energy supply efficiency as well as formulate appropriate policy to attract investment and establish public-private partnership initiatives.
    Keywords: Natural Gas Consumption; Growth; Pakistan; Cointegration; Causality
    JEL: Q4
    Date: 2011–11–26

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