nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒04‒23
ten papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Does Trust Promote Growth? By Roman Horváth
  2. Government spending, corruption and economic growth By d'Agostino, Giorgio; Dunne, Paul J.; Pieroni, Luca
  3. Can a home country benefit from FDI? A theoretical analysis By Chang, Chia-Ying
  4. New entries and economic growth By Chang, Chia-Ying; Hansen, Vera
  5. North-South Trade, Unemployment and Growth: What’s the Role of Labor Unions? By Wolf-Heimo Grieben; Fuat Sener
  6. Financial liberalization, growth, productivity and capital accumulation: The case of European integration By Agnieszka Gehringer
  7. Intellectual property rights, technical progress and the volatility of economic growth By Chu, Angus C.; Leung, Charles Ka Yui; TANG, C. H. Edward
  8. Globalization, Institutions, and the Ethnic Divide: Recent Longitudinal Evidence By Wunnava, Phanindra V.; Mitra, Aniruddha; Prasch, Robert E.
  9. Dynamic analysis of reductions in public debt in an endogenous growth model with public capital By Noritaka Maebayashi; Takeo Hori; Koichi Futagami
  10. Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel? By Samba Mbaye

  1. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We examine the effect of generalized trust on long-term economic growth. Unlike in previous studies, we use Bayesian model averaging to deal rigorously with model uncertainty and attendant omitted variable bias. In addition, we address endogeneity and assess whether the effect of trust on growth is causal. Examining more than forty regressors for nearly fifty countries, we show that trust exerts a positive effect on long-term growth and, based on the posterior inclusion probabilities, suggest that trust is an important driver of long-term growth. Our results also show that trust is key for growth in countries with a weak rule of law.
    Keywords: trust, economic growth, Bayesian model averaging
    JEL: O43 O10 Z13
    Date: 2012–04
  2. By: d'Agostino, Giorgio; Dunne, Paul J.; Pieroni, Luca
    Abstract: This paper considers the effects of corruption and government spending on economic growth. It starts from an endogenous growth model and extends it to account for the detrimental effects of corruption on the potentially productive components of government spending, namely military and investment spending. The resulting model is estimated on a sample of African countries and the results show, first, that the growth rate is strongly influenced by the interaction between corruption and military burden, with the interaction between corruption and government investment expenditure having a weaker effect. Second, allowing for the cyclical economic fluctuations in specific countries leaves the estimated elasticities close to those of the full sample. Third, there are significant conditioning variables that need to be taken into account, namely the form of government, political instability and natural resource endowment. These illustrate the cross country heterogeneity when accounting for quantitative direct and indirect effects of key variables on economic growth. Overall, these findings suggest important policy implications.
    Keywords: corruption; military spending; development economics; panel data; Africa
    JEL: D73 H5 O57
    Date: 2012–04–15
  3. By: Chang, Chia-Ying
    Abstract: The effects of outward FDI on home country’s growth remain an open question. The growth of outward FDI has renewed this attention. By allowing for endogenous decisions of firms on both whether to conduct FDI and whether to flow capital returns back to the home country, we have found several interesting results. First, as long as the probability of conducting FDI is positive, a higher proportion of entrepreneurs may harm economic growth of the home country in short-run and long-run. The ambiguous effects of transaction costs and MRS between domestic and foreign consumption on the home country’s economic growth result from the role of financial intermediaries. If the effect via inflow probability dominates, conducting FDI in a host country with a more liberalized capital account, or with a higher capital return rate may promote the home country’s economic growth rate. This is consistent with the findings in the outward FDI in European Union since 1970s.
    Keywords: outward FDI, economic growth, capital returns, financial intermediaries,
    Date: 2012–03–19
  4. By: Chang, Chia-Ying; Hansen, Vera
    Abstract: The main goal of this paper is to construct a theoretical model that provides an explanation for the relationship between growth and new entry that is consistent with empirical evidence. The model is a four sector endogenous growth model in which there is a technologically advanced and a technologically laggard consumption goods which are imperfect substitutes. The production of each good requires its own stock of human capital and physical capital. The accumulation of physical capital and human capital in each industry is modelled by a Cobb-Douglas production function. The main result of the model is that new entries have a positive effect on the fraction of the existing stock of human capital devoted to the accumulation of human capital in both the advanced and laggard sectors. However, this effect is stronger in the advanced sectors than in the laggard sectors. This result is consistent with empirical evidence.
    Keywords: new entry, growth, advanced, laggard, technology,
    Date: 2012–03–19
  5. By: Wolf-Heimo Grieben (Department of Economics, University of Konstanz, Germany); Fuat Sener (Department of Economics, Union College, Schenectady, New York, USA)
    Abstract: We construct a North-South product-cycle model of trade with fully-endogenous growth in which both countries experience unemployment due to union wage bargaining. We find that unilateral Northern trade liberalization reduces growth and increases unemployment in both countries, while unilateral Southern trade liberalization has the opposite effects. We show that the existence of labor unions matters for trade liberalization to have any effect on Northern innovation and worldwide growth. For empirically plausible parameter values, bilateral trade liberalization by equal amounts increases growth and reduces unemployment in both countries. Stronger Northern labor unions hurt both countries by reducing growth and increasing unemployment. However, stronger Southern labor unions exert a positive growth effect for both countries, while decreasing Northern unemployment and increasing Southern unemployment.
    Keywords: trade liberalization, product cycle, endogenous growth, labor unions, unemployment
    JEL: F16 F43 J51 O31
    Date: 2012–03–31
  6. By: Agnieszka Gehringer
    Abstract: In the present contribution, we concentrate on the process of financial liberalization in a specific context of European economic and monetary integration. We implement de facto and de jure measures of financial liberalization and find that formal aspects of financial openness generate a strongly positive impact on economic growth and its sources, productivity growth and capital accumulation. Moreover, there is evidence of a positive contribution to the process stemming from the EU membership, while no substantial effect comes from the euro adoption. Finally, we investigate the effects from financial integration on country groups within the EU.
    Keywords: Financial integration, economic growth, productivity, European integration
    JEL: F41 F36 F43
    Date: 2012–03–16
  7. By: Chu, Angus C.; Leung, Charles Ka Yui; TANG, C. H. Edward
    Abstract: In this note, we analyze the effects of intellectual property rights on the volatility of economic growth. Our analysis is motivated by the observation that the strengthening of patent protection and the increase in R&D in the US coincide with a reduction in growth volatility beginning in the mid 1980’s. To analyze this phenomenon, we develop an R&D-based growth model with aggregate uncertainty in the innovation process and apply the model to ask whether increasing patent strength and R&D can lead to a significant reduction in growth volatility. We find a small but non-negligible effect that explains no less than 10% of the observed reduction in growth volatility in the US.
    Keywords: Economic growth; Intellectual property rights; Growth volatility
    JEL: E32 O34 O33
    Date: 2012–04
  8. By: Wunnava, Phanindra V. (Middlebury College); Mitra, Aniruddha (Middlebury College); Prasch, Robert E. (Middlebury College)
    Abstract: This paper investigates the determinants of economic growth emphasizing the role of institutional quality, social fragmentation, and increasing global integration on recent growth experience. Our longitudinal data consists of 103 countries covering the period 1992-2005. We find that democracies have significantly outperformed autocracies over the sample period and the security of property rights has played a critical role in promoting economic growth. Ethnic heterogeneity has been a significant impediment to growth but religious and linguistic heterogeneity have not. Further, while economic globalization has had a general beneficial impact on economic growth, societies marked by greater ethnic heterogeneity have actually gained more from global integration. This suggests the importance of globalization in redressing the detrimental impact of ethnic cleavages in society (Hegre et al, 2003; Bhagwati, 2004; Mousseau and Mousseau, 2008; Dreher et al, 2008).
    Keywords: ethnic heterogeneity, property rights, democracy, growth, globalization
    JEL: O47 O43 P14
    Date: 2012–03
  9. By: Noritaka Maebayashi (Graduate School of Economics, Osaka University); Takeo Hori (College of Economics, Aoyama Gakuin University); Koichi Futagami (Graduate School of Economics, Osaka University)
    Abstract: We construct an endogenous growth model with productive public capital and government debt when government debt is adjusted to the target level. We examine how reducing public debt in an economy with a large public debt affects the transition of the economy and welfare. We find that the government faces the following trade off when reducing its debt. In the short run, public investment is reduced to decrease the debt and this has a negative effect on welfare. However, as the interest payments on the debt decrease, public investment begins to increase. Eventually, the government can increase the amount of public investment by more than before. This has a positive effect on welfare, implying that reducing the debt is welfare improving. Furthermore, we find that the adjustment speed of reductions in debt affects welfare crucially. The relationships between the welfare gains and the adjustment speed are U-shaped in many cases. However, they are decreasing monotonically when the tax rate is low and the initial debt?GDP ratio is sufficiently large.
    Keywords: Reductions in public debt, Debt policy rule, Public capital, Endogenous Growth
    JEL: E62 H54 H63
    Date: 2012–04
  10. By: Samba Mbaye (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: The literature on the effect of real exchange rate undervaluation on growth points toward two main transmission channels: the "capital accumulation channel" and the "total factor productivity (TFP) growth channel". This paper carries out an empirical investigation on the TFP growth channel. We provide answers to the three following questions: Does undervaluation of the currency boost the overall productivity level in the economy? If so, does this "undervaluation-induced" productivity improvement significantly enhance growth? And finally, what is the magnitude of the TFP growth channel relative to the capital accumulation channel? Based on a panel of 72 countries over 1970-2008, and separating explicitly the effect of undervaluation from that of overvaluation, our estimations suggest that: (i) the TFP growth channel is empirically verified, (ii) this channel seems to convey the most important part of the growth-enhancing effect of undervaluation. These results are robust to using different measures of real exchange rate undervaluation.
    Keywords: total factor productivity;real exchange rate misalignment;growth
    Date: 2012–04–16

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