nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒01‒10
three papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Growth with a Fixed Factor By Erzo G. J. Luttmer
  2. A tale of three countries: recovery after banking crises By Zsolt Darvas
  3. Financial dollarization in Russia: causes and consequences By Ponomarenko, Alexey; Solovyeva, Alexandra; Vasilieva, Elena

  1. By: Erzo G. J. Luttmer (Department of Economics, University of Minnesota and Federal Reserve Bank of Minnesota)
    Abstract: Consider an economy in which a fi…xed supply of unskilled labor can be combined with knowledge capital to produce consumption. The technology for accumulating knowledge capital is linear in knowledge capital. This leads to long-term growth if the production function for consumption goods is approximately Cobb-Douglas for large values of the stock of knowledge capital. The quality-ladder economy of Boldrin and Levine [2010] generates a menu of Leontief technologies with this feature. If the initial capital stock is low, there can be a long period of stagnation before unskilled wages start to grow, as in Lewis [1954]. A small open economy with a sufficiently low initial capital stock will run a trade surplus during its initial stages of development.
    Keywords: economic growth, aggregate productivity
    JEL: O4
    Date: 2012–01–01
  2. By: Zsolt Darvas
    Abstract: Three small, open European economies â?? Iceland, Ireland and Latvia â?? experienced serious trouble during the global financial crisis. Behind their problems were rapid credit growth and expansion of other banking activities in the years leading up to the crisis, largely financed by international borrowing. The crisis hit Latvia harder than any other country, and Ireland also suffered heavily, while Iceland exited the crisis with the smallest fall in employment, despite the greatest shock to the financial system. The purpose of this Policy Contribution is to compare the policy responses in, and the adjustments made by, the three countries. Based on this comparison, it draws lessons for exchange rate policy, internal devaluation, capital controls, banking sector restructuring and fiscal consolidation. It makes a strong case for a European banking federation.
    Date: 2011–12
  3. By: Ponomarenko, Alexey (BOFIT); Solovyeva, Alexandra (BOFIT); Vasilieva, Elena (BOFIT)
    Abstract: We review some aspects of financial dollarization in Russia, applying the main relevant theories to analyze the dynamics of several dollarization indicators. An econometric model of the short run dynamics of deposit and loan dollarization is estimated for the last decade. We find that ruble appreciation was the main driver of the de-dollarization that occurred then and of the later episode of renewed dollarization. We estimate the overall (and sectoral) currency mismatches of the Russian economy. The results show a gradual improvement of the net foreign currency position of the public sector, where we have seen significant accumulation of international reserves by the Bank of Russia and repayment of government debt. Evidence is also presented for the significant currency risk vulnerability of the nonbanking private sector. Several existing empirical studies are examined in order to assess the growth losses of the Russian economy following the crisis of 2008, which was linked with the financial dollarization.
    Keywords: financial dollarization; currency mismatch; balance sheet effects; Russia
    JEL: E44 F34 G32
    Date: 2012–01–02

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