nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒01‒03
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. ‘Love of Wealth’ and Economic Growth By Rehme, Günther
  2. Electricity Consumption, Financial Development and Economic Growth Nexus: A Revisit Study of Their Causality in Pakistan By Muhammad, Shahbaz
  3. More Bankers, More Growth? Evidence from OECD Countries By Gunther Capelle-Blancard; Claire Labonne
  4. Economic Performance and Government Size By António Afonso; João Tovar-Valles
  6. Military spending and economic growth: the case of Iran By Farzanegan, Mohammad Reza
  7. The Role of Finance in Economic Development: Benefits, Risks, and Politics By Beck, T.H.L.
  8. Accounting for the economic relationship between Japan and the Asian Tigers By Hideaki Hirata; Keisuke Otsu
  9. Optimal Government Size and Economic Growth in France (1871-2008) : An explanation by the State and Market Failures. By François Facchini; Mickaël Melki
  10. Quality of taxation and the crisis: Tax shifts from a growth perspective By Doris Prammer
  11. Banks' wholesale funding and credit procyclicality: evidence from Korea By Jeong, Sangjun; Jung, Hueechae
  12. Consequences of Political Instability, Governance and Bureaucratic Corruption on Inflation and Growth: The Case of Pakistan By Haider, Adnan; Din, Musleh ud; Ghani, Ejaz
  13. Catch-up growth followed by stagnation: Mexico, 1950–2010 By Timothy J. Kehoe; Felipe Meza

  1. By: Rehme, Günther
    Date: 2011–12–20
  2. By: Muhammad, Shahbaz
    Abstract: This study contributes to energy economic literature by incorporating financial development in neo-classical production function to investigate the electricity consumption and economic growth nexus in case of Pakistan. ARDL bounds testing approach has been applied to examine cointegration between the series over the period of 1971-2009. The direction of causal relationship between the variables is tested by applying VECM Granger causality approach and robustness of causality has been checked by innovative accounting approach (IAA). Our findings confirm the existence of cointegration among the variables. The results indicate that financial development, electricity consumption, capital and labour contribute to economic growth. The VECM Granger causality analysis reveals that feedback hypothesis is found between electricity consumption and economic growth, financial development and electricity consumption, economic growth and financial development, capital and economic growth and, capital and financial development. This implies that energy (electricity) conservation policies will not be appreciated in case of Pakistan. Furthermore, government of Pakistan should encourage making investments on research and development to articulate new energy savings technology to sustain economic growth. In this manner, financial sector should launch new financial policy to encounter the rising demand for electricity and enhance the process of capitalization to raise economic growth by offering and distributing financial resources to efficient and profit oriented ventures.
    Keywords: Electricity Consumption; Financial Development; Economic Growth
    JEL: Q4
    Date: 2011–12–22
  3. By: Gunther Capelle-Blancard; Claire Labonne
    Keywords: Banking system, Growth
    JEL: G20 G G A
    Date: 2011–11
  4. By: António Afonso; João Tovar-Valles
    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.
    Keywords: growth, institutions, fiscal rules, pooled mean group, common correlated effects Classification-C10, C23, H11, H30, O40
    Date: 2011–10
  5. By: Johansson, Anders C. (China Economic Research Center); Wang, Wun (China Economic Research Center)
    Abstract: This paper analyzes the relationship between financial repression and structural change. We present a simple theoretical model of structural transformation in which the impact of financial repression on unbalanced growth is studied. Governments may choose to repress the financial sector to allow for the development of the industry sector while inhibiting growth in the domestic service sector. When investigating the predictions of our model using data for a panel of countries, we find that financial repression have a significant negative effect on structural transformation. In countries with higher levels of financial repression, the industry sector is developed rapidly while the service sector is held back. The results are robust to different country sample compositions, alternative measures of sectoral structure, and different measures of financial repression. The analysis suggests that financial repression is an important driver of structural imbalances, especially in countries with heavy state intervention and where the government strongly favors industrial expansion. Our findings have policy implications for governments that are experiencing rapid economic transformation and that are using financial repression to achieve a long-run industrial output growth.
    Keywords: Financial repression; Structural change; Structural transformation; Economic development
    JEL: G18 L52 O16 O40
    Date: 2011–12–20
  6. By: Farzanegan, Mohammad Reza
    Abstract: Iranian government budget on military over the last decade has been higher than the average of the world. The current increasing international sanctions aim to reduce the military capabilities and capacities of the Iranian government. In this study, we analyze the response of the Iranian economy to shocks in its military budget from 1959-2007, using Impulse Response Functions (IRF) and Variance Decomposition Analysis (VDA) techniques. The Granger causality results show that there is unidirectional causality from military spending to the economic growth. The response of income growth to increasing shocks in the military budget is positive and statistically significant.
    Keywords: Military spending; Economic growth; VAR model; Impulse Response; Sanctions; Iran
    JEL: H50 H56 C22
    Date: 2011–12–20
  7. By: Beck, T.H.L. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Theoretical and empirical research has shown that a sound and effective financial system is critical for economic development and growth. The financial system, however, is also subject to boom and bust cycles and fragility, with negative repercussions for the real economy. Further, the political structure of societies, often pre-determined by historic experience, is critical for the structure and development of the financial system. This paper is a critical survey of three related strands of literature – the finance and growth literature, the literature on financial fragility, and the politics and finance literature.
    Keywords: Financial Development;Financial Fragility;Finance and Politics;Economic Development;Access to Finance;Banking Crisis.
    JEL: G0 G1 G2 O1 O4
    Date: 2011
  8. By: Hideaki Hirata; Keisuke Otsu
    Abstract: In this paper, we construct a two-country business cycle accounting model in order to investigate quantitatively the relationship between Japan and the Asian Tigers. Our model is based on Backus, Kehoe and Kydland (1994) in which each economy produces tradable intermediate goods that are aggregated to form final goods within each economy. We apply the business cycle accounting method of Chari, Kehoe and McGrattan (2007) and find that the main source of high frequency fluctuation in output in each economy is the fluctuation of production efficiency within its own economy. Furthermore, the growth in the Asian Tigers'production efficiency had a significant positive effect on Japanese economic growth over the 1980-2009 period through the endogenous terms of trade effect.
    Keywords: International Business Cycles; Business Cycle Accounting; Terms of trade; Productivity
    JEL: E13 E32 F41
    Date: 2011–11
  9. By: François Facchini (Centre d'Economie de la Sorbonne); Mickaël Melki (Centre d'Economie de la Sorbonne)
    Abstract: This paper analyses the effect of public expenditure on economic growth from both a theoretical and an empirical point of view. Given that the economic literature supplies numerous and conflicting views on the topic, the article offers a framework combining both theories of market failures and State failures to account for an inverted U-shapped relation between government size and GDP growth. The empirical contribution is to provide evidence through a long time-series analysis of the existence of such a relation on the period 1871-2008 for France, which offers one of the longest stable democratic periods to analyse.
    Keywords: Public spending, public expenditure, government size, BARS curve, Armey Curve, economic growth, market failure, France.
    JEL: H11 P44 H50
    Date: 2011–12
  10. By: Doris Prammer (European Commission)
    Abstract: One aim of consolidation after the crisis on the taxation side is to curb growth as little as possible. Economic literature suggests that some tax systems are more conducive to growth, in particular those relying on consumption, environmental and property taxation. This paper reflects on behavioural responses of economic agents to taxation and reviews the literature on the impact of tax structures on growth. Furthermore, it analyses the tax structure in the EU-27 Member States and assess if the crises has triggered a move towards tax systems more conducive to growth.
    Keywords: financial crisis, tax efficiency, optimal taxation, tax structure, tax shift
    JEL: H11 H21 H26 E62
    Date: 2011–12
  11. By: Jeong, Sangjun; Jung, Hueechae
    Abstract: Credit procyclicality has recently been the focus of considerable attention, but what fuels the often excessive credit growth is rarely questioned. We investigate the relationship between the composition of banks' liabilities and their credit procyclicality. After examining the macroeconomic context where banks rely increasingly on wholesale funding (WSF), we estimate the effect of WSF on the banks’ credit growth using panel data for the commercial banks of Korea between 2000:1 and 2011:2. We find that a higher sensitivity of banks' WSF to the business cycle leads to an excessive response of credit growth to the business cycle, even with a low share of WSF on bank liabilities. This finding suggests that the regulation of banks’ WSF mechanism may contribute to financial stability through a bank credit channel of monetary policy. On the other hand, we find that overseas WSF has a more marked effect on credit procyclicality, which may additionally exacerbate the financial fragility of export-led emerging economies.
    Keywords: credit procyclicality; wholesale funding; financial fragility
    JEL: E32 E44 G21
    Date: 2011–12–01
  12. By: Haider, Adnan; Din, Musleh ud; Ghani, Ejaz
    Abstract: This paper presents a theoretical model with micro-foundations that captures some important features of Pakistan's economy which have emerged in sixty-four years of its history. A comparison of Pakistan’s economic performance during different regimes shows that macroeconomic fundamentals tend to show an improvement during the autocratic regimes as compared with those prevailing during democratic regimes. In particular, periods of autocratic regimes are typically characterized by low inflation, robust growth and low level of bureaucratic corruption due to better governance. In contrast, the economic performance during the democratic regimes has been observed to worsen with weak governance and high levels of corruption, high inflation due partly to reliance on seigniorage to finance public spending, and lackluster growth. Using annual data from 1950 to 2011, computational modeling is carried out by applying Markov-Regime switching technique with maximum-likelihood procedures. The estimation results based on empirical modeling setup are supportive of the above stylized-facts and also confirm the implications of the theoretical model.
    Keywords: Political Instability; Governance; Corruption; Inflation; Growth
    JEL: D73 O42 E31 H6
    Date: 2011–12–12
  13. By: Timothy J. Kehoe; Felipe Meza
    Abstract: In 1950 Mexico entered an economic takeoff and grew rapidly for more than 30 years. Growth stopped during the crises of 1982–1995, despite major reforms, including liberalization of foreign trade and investment. Since then growth has been modest. We analyze the economic history of Mexico 1877– 2010. We conclude that the growth 1950–1981 was driven by urbanization, industrialization, and education and that Mexico would have grown even more rapidly if trade and investment had been liberalized sooner. If Mexico is to resume rapid growth — so that it can approach U.S. levels of income — it needs further reforms.
    Date: 2011

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