nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒12‒19
fourteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Credit Growth and Bank Soundness: Fast and Furious? By Deniz Igan; Marcelo Pinheiro
  2. Exports, imports and growth. New evidence on Italy: 1863-2004 By Barbara Pistoresi; Alberto Rinaldi
  3. Corruption, Globalization, and Economic Growth: Theory and Evidence By Kunieda, Takuma; Okada, Keisuke; Shibata, Akihisa
  4. Long-run Welfare under Externalities in Consumption, Leisure, and Production: A Case for Happy Degrowth vs. Unhappy Growth By Ennio Bilancini; Simone D’Alessandro
  5. Effects on growth of environmental policy in a small open economy By Adu, George
  6. Aid and Fertility: What Does the Cross-Country Evidence Show? By David Cuberes; Kevin Tsui
  7. Fiscal spending for economic growth in the presence of imperfect markets By Islam, Asif; López, Ramón
  8. Public Debt and Economic Growth in Italy By Fabrizio Balassone; Maura Francese; Angelo Pace
  9. The Eurozone Crisis: How Banks and Sovereigns Came to be Joined at the Hip By Ashoka Mody; Damiano Sandri
  10. Understanding the Pattern of Growth and Equity in the People’s Republic of China By Liu, Minquan
  11. Real Exchange Rates, Trade, and Growth: Italy 1861-2011 By Virginia Di Nino; Barry Eichengreen; Massimo Sbracia
  12. Low-Income Countries' BRIC Linkage: Are There Growth Spillovers? By Yongzheng Yang; Issouf Samaké
  13. Property rights and economic growth: evidence from a natural experiment By Brunt, Liam
  14. Credit Growth and Capital Buffers: Empirical Evidence from Central and Eastern European Countries By Adam Gersl; Jakub Seidler

  1. By: Deniz Igan; Marcelo Pinheiro
    Abstract: We examine the risks to bank soundness associated with credit booms in a large set of countries. Using bank-level data in 90 countries between 1995 and 2005, we analyze the relationship between credit growth and bank soundness taking into account the potential two-way causality. We find that, while sounder banks tend to grow faster at moderate-growth periods, credit growth becomes less dependent on soundness during booms. These findings shed some light on why credit booms are often associated with financial crises.
    Keywords: Bank soundness , Banks , Credit expansion , Cross country analysis , Economic models , Private sector ,
    Date: 2011–12–01
  2. By: Barbara Pistoresi; Alberto Rinaldi
    Abstract: The nexus between trade and economic growth in Italy has been widely debated by historiography. However, there are not long run analysis on this topic that cover the whole span from Unification to present days. This paper contributes to fill this gap by investigating the relationship between real exports, imports and GDP in Italy from 1863 to 2004 by using cointegration analysis and causality tests. The outcome suggests that these variables comove in the long run but the direction of causality varies across time. In the period prior to the First World War import growth led GDP growth that in turn led export growth. Conversely, in the post-Second World War period we have a strong bidirectionality between imports and exports consequent on the increase in intra-industry trade. We also find a weak support for export-led growth and growth-led imports. This suggests that exports were not the only or the main driver of economic growth. There was probably a multiplicity of factors at work, among which high rates of capital formation and the expansion of internal demand probably stood out
    Keywords: Trade; economic growth; Italy; unit root tests; cointegration analysis; Granger-causality;
    JEL: F43 O11 N1 N7
    Date: 2011–10
  3. By: Kunieda, Takuma; Okada, Keisuke; Shibata, Akihisa
    Abstract: We investigate, both theoretically and empirically, how the negative effects of government corruption on economic growth are magnified or reduced by capital account liberalization. Our model shows that highly corrupt countries impose higher tax rates than do less corrupt countries, thereby, magnifying the negative impacts of government corruption on economic growth in the highly corrupt countries and reducing the impacts in the less corrupt countries if capital account liberalization is enacted. Empirical evidence obtained from an analysis of the panel data collected from 111 countries supports our theoretical predictions. Our theoretical and empirical results contribute to the recent policy debates on the merits or demerits of capital account liberalization.
    Keywords: Economic growth; Government Corruption; Capital account liberalization; Two-country model
    JEL: O42 E62 F43 O40
    Date: 2011–11–24
  4. By: Ennio Bilancini; Simone D’Alessandro
    Abstract: In this paper we contribute to the debate on the relationship between growth and well-being by examining an endogenous growth model where we allow for externalities in consumption, leisure, and production. We analyze three regimes: a decentralized economy where each household makes isolated choices without considering their external e_ects, a planned economy where a myopic planner fails to recognize both leisure and consumption externalities but recognizes production externalities, and a planned economy with a fully informed planner. We _rst compare the balanced growth paths under the three regimes and then we numerically investigate the transition to the optimal bilance growth path. We provide a number of _ndings. First, in a decentralized economy growth or labor (or both) are greater than in the regime with a fully informed planner, and hence are sub-optimal from a welfare standpoint. Second, a myopic intervention which overlooks consumption and leisure externalities leads to more growth and labor than in both the decentralized and the fully informed regime. Third, we provide a case for happy degrowth: a transition to the optimal balanced growth path that is associated with downscaling of production, a reduction in private consumption, and an ongoing increase in leisure and well-being.
    Keywords: degrowth; endogenous growth; consumption externalities; leisure externalities; production externalities;
    JEL: Q13 E62 H21 H23
    Date: 2011–10
  5. By: Adu, George
    Abstract: This paper examines the effect of environmental policy on economic growth in a small open economy in a neoclassical framework with pollution as an input. We show that environmental policy imposes a drag on long run growth in both the open and closed economy cases. The effect of environmental policy on growth is stronger in the open economy case relative to the closed economy model if the country has strong aversion to pollution and thus serves as a net exporter of capital in the international capital market. On the other hand, if the agents in the economy have low aversion to pollution and thus import capital, the effect of environmental care on growth is stronger in the closed economy relative to the open economy. Thus, from our set-up, environmental policy is harmful to growth but environmental sustainability need not be incompatible with continued economic growth.
    Keywords: Economic growth, Pollution tax, Capital-output ratio, Open economy, Capital flight, Environmental Economics and Policy, O40, O41, Q56,
    Date: 2011–11
  6. By: David Cuberes; Kevin Tsui (Department of Economics, The University of Sheffield; The John E. Walker Department of Economics, Clemson University)
    Abstract: This paper examines the effects of foreign aid on fertility rates in recipient countries using Rajan and Subramanian’s (2008) cross-sectional and panel methods. Our cross-section results suggest that foreign aid has a positive effect on fertility. Interestingly, social sector aid (but not economic aid) is responsible for this demographic effect. The panel evidence confirms the positive effect of foreign aid on total fertility rates, and that social aid is more relevant than economic aid. Given that the literature has found no robust relationship between foreign aid and economic growth, our findings raise the possibility of an aid-induced population poverty trap.
    Keywords: foreign aid, population growth, Malthusian traps
    JEL: F35 I31 J11
    Date: 2011–12
  7. By: Islam, Asif; López, Ramón
    Abstract: Political economy factors tend to induce many governments to spend on private goods (non-social subsidies) to the detriment of spending on social and public goods. We show that this bias in spending patterns is particularly costly for economic growth when capital markets are imperfect. We thus provide a simple taxonomy of government spending: spending in goods that mitigate market failures versus spending in non-social subsidies which frequently have the sole purpose of benefiting special interest groups. We develop a theoretical model and link it quite closely to an empirical model. The empirical results fully corroborate the hypothesis that spending biases in favor of non-social subsidies reduce the rate of economic growth over the long run. The empirical findings are exceptionally robust.
    Keywords: economic growth investment; government spending; market imperfections; non-social subsidies
    JEL: H42 H44 H5
    Date: 2011–12
  8. By: Fabrizio Balassone (Bank of Italy); Maura Francese (Bank of Italy); Angelo Pace (Bank of Italy)
    Abstract: In this paper we investigate the link between government debt-to-GDP ratio and real per capita income growth in Italy over 1861-2009. We model our regression analysis on a standard production function. Our results support the hypotheses of a negative relation between public debt and growth and of a stronger effect of foreign debt compared to domestic debt before World War I. The effect of public debt on growth appears to work mainly through reduced investment. These results help explain the different reaction of per capita GDP growth to the debt-ratio over 1880-1914 (when the negative correlation between the two variables is particularly strong) and 1985-2007 (when the correlation appears to break down when debt starts declining). A descriptive analysis of fiscal policy in these two periods suggests that differences in the timing of fiscal consolidation as well as in the size and composition of the budget are additional explanatory factors.
    Keywords: public debt, economic growth, Italian economic history
    JEL: H63 E60 N0
    Date: 2011–10
  9. By: Ashoka Mody; Damiano Sandri
    Abstract: We use the rise and dispersion of sovereign spreads to tell the story of the emergence and escalation of financial tensions within the eurozone. This process evolved through three stages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly due to common global factors. The rescue of Bear Stearns in March 2008 marked the start of a distinctively European banking crisis. During this key phase, sovereign spreads tended to rise with the growing demand for support by weakening domestic financial sectors, especially in countries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.
    Keywords: Banks , Cross country analysis , Economic growth , Economic models , Europe , Financial crisis , Financial sector , Global competitiveness , Sovereign debt ,
    Date: 2011–11–17
  10. By: Liu, Minquan (Asian Development Bank Institute)
    Abstract: There are likely to be many factors which have together shaped the current pattern of growth and equity in the People’s Republic of China (PRC). Among them are the foundations laid in the pre-1978 era, especially in respect of land-related institutional reforms and social sector investments. These factors successfully complemented the subsequent export and foreign direct investment FDI promotion strategies the PRC followed in the post-1978 years. However, given the large size of the PRC, while these strategies have helped to kick-start its economic take-off, the long-run growth of the country cannot depend on it.
    Keywords: prc; income distribution; prc growth patterns; foreign direct investment; human capital
    JEL: F14 N35 O15 O53
    Date: 2011–12–08
  11. By: Virginia Di Nino (Bank of Italy); Barry Eichengreen (University of California, Berkeley); Massimo Sbracia (Bank of Italy)
    Abstract: What is the relationship between real exchange rate misalignments and economic growth? And what effect, if any, did undervaluations or overvaluations of the lira/euro have on Italy's growth? We address these questions by presenting, first, three main facts: (i) there is a positive relationship between undervaluation and growth; (ii) this relationship is strong for developing countries and weak for advanced countries; (iii) these results tend to hold for both the pre- and the post-World War II period. Building a simple analytical model, we explore channels through which undervaluation may exert a positive effect on real GDP. We assume that productivity is higher in the tradeable-goods than in the non-tradeable-goods sector, and examine the roles of market structure, scale economies and wage flexibility in channelling resources from the latter to the former sector, increasing exports and real GDP. We then turn to Italy and verify empirically that, as the theory suggests, undervaluation has positively affected its exports. Undervaluation has been helpful, in particular, to increase the exports of high-productivity sectors, such as most manufacturing industries. Finally, we describe the misalignments of the lira/euro since 1861, analyze their determinants and draw the implications for Italy's economic growth.
    Keywords: Currency misalignments, Competitiveness, Italy, Export, Growth
    JEL: F30 F10 O10 N00
    Date: 2011–10
  12. By: Yongzheng Yang; Issouf Samaké
    Abstract: Trade and financial ties between low-income countries (LICs) and Brazil, Russia, India, and China (BRICs) have expanded rapidly in recent years. This gives rise to the potential for growth to spill over from the latter to the former. We employ a global vector autoregression (GVAR) model to investigate the extent of business cycle transmission from BRICs to LICs through both direct (FDI, trade, productivity, exchange rates) and indirect (global commodity prices, demand, and interest rates) channels. The estimation results show that there are significant direct spillovers while indirect spillovers also matters in many cases. Based on these results, we show that growing LIC-BRIC ties have significantly helped alleviate the adverse impact of the recent global financial crisis on LIC economies.
    Keywords: Brazil , Business cycles , China , Economic growth , Economic models , India , Low-income developing countries , Russian Federation , Spillovers ,
    Date: 2011–11–16
  13. By: Brunt, Liam (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: In 1795 the British took control of the Cape colony (South Africa) from the Dutch; and in 1843 they exogenously changed the legal basis of landholding, giving more secure property rights to landholders. Since endowments and other factors were held constant, these changes offer clean tests of the effects on economic growth of colonial identity and secure property rights. The effects of both changes were immediate, positive and large. Other legal and institutional changes, such as the move to a common law system in 1827, had no such effects on economic growth.
    Keywords: Economic growth; legal origins; property rights
    JEL: N47 O43
    Date: 2011–12–08
  14. By: Adam Gersl; Jakub Seidler
    Abstract: Excessive credit growth is often considered to be an indicator of future problems in the financial sector. This paper examines the issue of how to determine whether the observed level of private sector credit is excessive in the context of the “countercyclical capital bufferâ€, a macroprudential tool proposed in the new regulatory framework of Basel III by the Basel Committee on Banking Supervision. An empirical analysis of selected Central and Eastern European countries, including the Czech Republic, provides alternative estimates of excessive private credit and shows that the HP filter calculation proposed by the Basel Committee is not necessarily a suitable indicator of excessive credit growth for converging countries.
    Keywords: Basel regulation, credit growth, financial crisis countercyclical buffer.
    JEL: G01 G18 G21
    Date: 2011–11

This nep-fdg issue is ©2011 by Iulia Igescu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.