nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒06‒25
twenty-one papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Trade Openness and Economic Growth: A Panel Causality Analysis By Thomas Gries; Margarete Redlin
  2. Understanding bubbly episodes By Vasco Carvalho; Alberto Martin; Jaume Ventura
  3. Do Political Institutions Yield Multiple Growth Regimes? By David Coyne; Chih Ming Tan
  4. Military Spending and Economic Growth: The Case of Iran By Mohammad Reza Farzanegan
  5. An Empirical Analysis of Higher Education and Economic Growth in West Virginia By Bashir, Saima; Herath, Janaranjana; Gebremedhin, Tesfa
  6. The dynamics of catch-up and skill and technology upgrading in China By Funke, Michael; Chen, Xi
  7. Social security and growth in an agin economy : the case of actuarial fairness By Gilles Le Garrec
  8. Welfare Implications and Equilibrium Indeterminacy in a Two-sector Growth Model with Consumption Externalities By Been-Lon Chen; Yu-Shan Hsu; Kazuo Mino
  9. Public investment and regional growth and convergence: Evidence from Greece By Psycharis, Yannis; Rodríguez-Pose, Andrés; Tselios, Vassilis
  10. Reconsidering the effect of economic development on urban unemployment under non-homothetic preferences By Takeuchi, Nobuyuki
  11. Pro-poor Growth in Andean Countries By Abdelkrim Araar
  12. Quantity or quality? foreign aid implications on economic growth in least developed countries By Wamboye, Evelyn
  13. A Numerical Evaluation on a Sustainable Size of Primary Deficit in Japan By Real Arai; Junji Ueda
  14. A Computable OLG Model for Gender and Growth Policy Analysis By Pierre-Richard Agénor
  15. The Evolution of Ideology, Fairness and Redistribution By Alberto Alesina; Guido Cozzi; Noemi Mantovan
  16. Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence By Emi Nakamura; Dmitriy Sergeyev; Jón Steinsson
  17. Evaluating the Impact of Public Programs of Financial Aid to SMEs during times of crisis: The Spanish Experience By Anahí Briozzo; Clara Cardone-Riportella
  18. Regional Income Inequality and Economic Growth: A Spatial Econometrics Analysis for Provinces in the Philippines By Pede, Valerien O.; Sparks, Adam H.; McKinley, Justin D.
  20. Effects of international monetary integration on inflation, economic growth and current account By Stanisic, Nenad
  21. Macroeconomic transmission of eurozone shocks to emerging economies By Bilge Erten

  1. By: Thomas Gries (University of Paderborn); Margarete Redlin (University of Paderborn)
    Abstract: This paper examines the short-term and long-run dynamics between per capita GDP growth and openness for 158 countries over the period 1970-2009. We use panel cointegration tests and panel error-correction models (ECM) in combination with GMM estimation to explore the causal relationship between these two variables. We approach the problem of a potential endogeneity between openness and growth by including only growth rates and lagged values of the independent variable. Additionally, we apply Difference GMM and System GMM estimation. These estimators also address the issue of a possible correlation between the lagged endogenous variable and the error term. The results suggest a long-run relationship between openness and economic growth with a short-run adjustment to the deviation from the equilibrium for both directions of dependency. The long-run coefficients indicate a positive significant causality from openness to growth and vice versa, indicating that international integration is a beneficial strategy for growth in the long term. By contrast the short-run coefficient shows a negative short-run adjustment, suggesting that openness can be painful for an economy undergoing short-term adjustments. In addition to the entire panel we subdivide the data into income-related subpanels. While the long-run effect remains predominantly positive and significant, the short-run adjustment becomes positive when the income level increases. This result suggests that different trade structures in low-income and high-income countries have different effects on economic growth.
    Keywords: openness, trade, growth, development, panel cointegration
    JEL: F10 F15 F43
    Date: 2012–06
  2. By: Vasco Carvalho; Alberto Martin; Jaume Ventura
    Keywords: bubbles, dynamic inefficiency, economic growth, financial frictions, pyramid schemes
    JEL: E32 E44 O40
    Date: 2012–01
  3. By: David Coyne (Federal Reserve Bank of Boston, USA); Chih Ming Tan (Clark University, USA)
    Abstract: We investigate the effects of political institutions on economic growth. We specifically explore this relationship while controlling for heterogeneity and model uncertainty. We use threshold regression (Hansen (2000)) to search for possible nonlinearities and/or interaction effects with respect to political institutions. We also implement a novel approach to account for theory uncertainty by applying Bayesian model averaging in the threshold regression context. We find that less democratic countries, specifically those with less competitiveness in executive recruitment, follow a different growth process than those with higher competitiveness.
    Keywords: Economic Growth, Institutions, Threshold Regression, Regression Trees, Bayesian Model Averaging
    JEL: C21 C51 O43 O47
    Date: 2012–06
  4. By: Mohammad Reza Farzanegan (University of Marburg)
    Abstract: Over the last decade, the Iranian government budget on military 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. 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). The Granger causality results show that there is unidirectional causality from the military spending growth rate to the economic growth rate. The response of income growth to increasing shocks in the military budget is positive and statistically significant.
    Keywords: dMilitary spending, Economic growth, VAR model, Impulse Response, Sanctions, Iran
    JEL: C22 H50 H
    Date: 2012
  5. By: Bashir, Saima; Herath, Janaranjana; Gebremedhin, Tesfa
    Abstract: Investment in education to increase economic growth, as one form of human development, has gained economists‟ and policy makers‟ interest. It establishes human capital that makes a substantial contribution to economic and income growth and preserves returns in the form of skilled labor which leads to increased development and improved quality of life. Different theories and models have used to examine the relationship between education and economic growth. Most of them paid attention to human capital accumulation as source of acceleration in economic growth. Some of them used human capital as an engine of economic growth to technological change. But for human accumulation, a country should invest more on education. Thus, the main objective of the study is to analyze higher education growth and economic growth in West Virginia. A set of simultaneous equations with three endogenous variables of per capita income change, education change and population change was used for the analysis. Results indicate that income growth and education growth are positively related while education growth reduces population growth in West Virginia.
    Keywords: Higher Education, Income, Growth, West Virginia, Community/Rural/Urban Development,
    Date: 2012
  6. By: Funke, Michael (BOFIT); Chen, Xi (BOFIT)
    Abstract: This paper accounts for China’s economic growth since 1980 in a unified endogenous growth model in which a sequencing of physical capital accumulation, human capital accumulation and innovation drives the rise in China’s aggregate income. The first stage is characterized by physical capital accumulation. The second stage includes both physical and human capital accumulation, and in the final stage innovation is added to the mix. Model calibrations indicate that the growth model can generate a trajectory that accords well with the different stages of development in China.
    Keywords: China; economic growth; transitional dynamics
    JEL: D90 O31 O33 O41
    Date: 2012–06–18
  7. By: Gilles Le Garrec (Observatoire Francais des Conjonctures Economiques)
    Abstract: In many European countries, due to population aging, the switch from conventional unfunded public pension systems to notional systems character- ized by individual accounts is in debate. In this article, we develop an OLG model in which endogenous growth is based on an accumulation of knowledge driven by the proportion of skilled workers and the time they have spent to be trained. In such a framework, we show that conventional pension systems, contrary to notional systems, can enhance economic growth by linking bene- ?ts only to partial earnings history. Thus, considering economic growth, the optimal adjustment to aging could consist in increasing the size of existing retirement systems rather than switching to notional systems.
    Keywords: social security,intertemporal choice, human capital
    JEL: H55 D91 E24
    Date: 2012–05
  8. By: Been-Lon Chen (Academia Sinica); Yu-Shan Hsu (National Chung Cheng University); Kazuo Mino (Kyoto University)
    Abstract: One-sector neoclassical growth models reveal that consumption externalities lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state only if there is a labor-leisure tradeoff. This paper shows that in a two-sector neoclassical growth model, even without a labor-leisure tradeoff, consumption spillovers easily lead to inefficient allocation in a steady state and indeterminate equilibrium toward the steady state. Consumption spillovers that yield over-accumulation of capital in an otherwise identical one-sector model may lead to under-accumulation of capital in two-sector models depending on relative capital intensities and relative degrees of externalities. Moreover, a two-sector model economy with consumption externalities is less stabilized than an otherwise identical one-sector model economy with consumption externalities.
    Keywords: two-sector model; consumption externalities; efficiency; indeterminacy
    JEL: E21 E32 O41
    Date: 2012–06
  9. By: Psycharis, Yannis; Rodríguez-Pose, Andrés; Tselios, Vassilis
    Abstract: This paper estimates the impact of public investment on regional economic growth and convergence at the NUTS III level in Greece. Using a new database of public expenditure per region for the period 1978-2007, it proposes a model which captures not just the impact of public investment in Greek prefectures, but also the spillover effects related to the existence of externalities from neighbouring regions. The results point to a positive long-run impact of public investment per capita on regional economic growth – but not on convergence – which also generates considerable spillover effects. However, the returns vary according to different types of public investment, with education and infrastructure spillovers having the highest impact. In general, public investment externalities seem to be more relevant for regional growth than direct public investment in each region. Finally, the impact of different types of public investment in Greece is mediated by politics and political factors, but the effect of politics disappears once we control for political-period-specific spatial-invariant variables.
    Keywords: convergence; economic growth; Greece; public investment; regional economics; regional policy; spatial econometrics; spillover effects
    JEL: R11 R12 R53 R58
    Date: 2012–03
  10. By: Takeuchi, Nobuyuki
    Abstract: We reconsider the effect of economic development on urban unemployment by introducing households with non-homothetic preferences into a sector-specific capital version of the Harris-Todaro model. Contrary to previous studies, this work shows that, while urban development reduces urban unemployment, rural development expands it. As for labor growth, it normally increases urban unemployment.
    Keywords: sector-specific capital; Harris-Todaro model; economic development; non-homothetic preference; urban unemployment
    JEL: O10 J60 O15
    Date: 2012–06
  11. By: Abdelkrim Araar
    Abstract: This paper studies the pro-poor growth in the Latino American Andean countries. We first present different definitions of pro-poorness and the related methods in order to generate the statistically robust results for classes of pro-poor measures. Also, we present the non anonymous pro-poor approach and we propose also a new method to study the inter-temporal pro-poor growth with the aim to capture the change of wellbeing of the poor over time. We apply these procedures to five L.A. countries, which are Ecuador, Colombia, Peru, Bolivia and Venezuela for the period between 2005 and 2010. In general, we find strong statistical evidence that the Andean L.A. countries growths have been absolutely and relatively pro-poor for the period between 2005 and 2010. However, the 2008 world economic crisis has affected temporarily growth and the latter was not absolutely pro-poor during this economic crisis. Starting from 2009, the L.A. countries have registered a remarkable economic recovery. This recovery has helped to growth to absolutely pro-poor and thus, to continue to reduce poverty in this region of world.
    Keywords: Pro-poor growth, Poverty, Inequality
    JEL: D63 D64
    Date: 2012
  12. By: Wamboye, Evelyn
    Abstract: Using panel data for the period of 1975-2011, this study attempts to answer the question of whether the quantity or quality of foreign aid matters to economic growth of least developed countries (LDCs). Quality effects are captured using different specifications of both bilateral and multilateral aid. The quantity effects are measured by the squared term on the aid variable. The timing of effects between aid and growth are controlled for using both short term (annual) and long term (5-year averaged) panel data. Issues of endogeneity, measurement bias, simultaneity and reverse causality are addressed. Generally, after controlling for trade, fiscal and monetary policies and other institutional factors, results from this study support the conclusion that quantity rather than quality of aid matters for economic growth of LDCs. These results are robust to different samples and estimation techniques. Nonetheless, the study does not discount the importance of the quality of aid, rather, emphasizes that regardless of the type of aid flows, quantity and continuous flow is important for LDCs.
    Keywords: Foreign aid; economic growth; LDCs; SGMM
    JEL: O11 F35 O19 F43
    Date: 2012–06–17
  13. By: Real Arai (Graduate School of Social Sciences, Hiroshima University); Junji Ueda (Policy Research Institute, Ministry of Finance Japan)
    Abstract: We investigate how large a size of primary deficit to GDP ratio the Japan’s government can sustain. For this investigation, we construct an overlapping generations model, in which multi-generational households live and the government maintains a constant ratio of primary deficit to GDP. We numerically show that the primary deficit cannot be sustained unless the rate of economic growth is unrealistically high, which is more than five percent according to our settings. Our result implies that Japan’s government needs to achieve a positive primary balance in the long-run in order to avoid the divergence of the public debt to GDP ratio.
    Keywords: fiscal sustainability, public debt, primary deficit, economic growth
    JEL: E62 H62 H63 H68
    Date: 2012–06
  14. By: Pierre-Richard Agénor
    Abstract: This paper develops a computable Overlapping Generations (OLG) model for gender and growth policy analysis. The model accounts for human and physical capital accumulation (both public and private), intra- and inter-generational health persistence, fertility choices, and women's time allocation between market work, child rearing, and home production. Bargaining between spouses and gender bias, in the form of discrimination in the work place and mothers' time allocation between daughters and sons, are also accounted for. The model is calibrated for a low-income country and various experiments are conducted, including improved access to infrastructure, an increase in subsidies to child care, and a reduction in gender bias. By focusing on steady-state effects, based on an explicit analytical characterization of the long-run equilibrium, the model provides a practical tool that may help to integrate more systematically interactions between structural policies, gender, and growth.
    Date: 2012
  15. By: Alberto Alesina (Harvard University); Guido Cozzi (Durham Business School); Noemi Mantovan (Bangor University)
    Abstract: Ideas about what is "fair" influence preferences for redistribution. We study the dynamic evolution of different economies in which redistributive policies, perception of fairness, inequality and growth are jointly determined. We show how including beliefs about fairness can keep two otherwise identical countries in di¤erent development paths for a very long time. We show how different initial conditions regarding how "fair" is the same level of inequality can lead to two permanently different steady states. We also explore how bequest taxation can be an efficient way of redistributing wealth to correct "unfair" past accumulation of inequality
    Keywords: Endogenous Growth, Basic and Applied R&D, Endogenous Technological Change, Common Law
    Date: 2012–04–20
  16. By: Emi Nakamura; Dmitriy Sergeyev; Jón Steinsson
    Abstract: We quantify the importance of long-run risks – persistent shocks to growth rates and uncertainty – in a panel of long-term aggregate consumption data for developed countries. We identify sizable and highly persistent world growth-rate shocks as well as less persistent country-specific growth rate shocks. The world growth-rate shocks capture the productivity speed-up and slow-down many countries experienced in the second half of the 20th century. We also identify large and persistent common shocks to uncertainty. Our world uncertainty process captures the large but uneven rise and fall of volatility that occurred over the course of the 20th century. We find that negative shocks to growth rates are correlated with shocks that increase uncertainty. Our estimates based on macroeconomic data alone line up well with earlier calibrations of the long-run risks model designed to match asset pricing data. We document how these dynamics, combined with Epstein-Zin-Weil preferences, help explain a number of asset pricing puzzles.
    JEL: E21 G12
    Date: 2012–06
  17. By: Anahí Briozzo (National Southern University, Bahía Blanca, Argentina); Clara Cardone-Riportella (Department of Financial Economics and Accounting, Pablo de Olavide University, Seville, Spain.)
    Abstract: The aim of this paper is to study the differential effects of the public programs that provide financial aid to small and medium enterprises during times of crisis in Spain. We use different methods to control for potential selection bias. Our results show that the effects of these programs are stronger during times of crisis: during normal periods, these programs impact assets, sales, efficiency, and productivity growth, whereas during recessions, their effects extend to employment growth.
    Keywords: public programs, impact evaluation, financial aid, SME, crisis, selection bias, average treatment effects
    Date: 2012–06
  18. By: Pede, Valerien O.; Sparks, Adam H.; McKinley, Justin D.
    Abstract: This paper revisits the inequality-growth relationship using data at the sub-national (provincial) level in the Philippines over the period 1991- 2000. A conditional convergence growth model is considered where the growth of per capita income depends on inequality and other growth factors. The contribution of each province to the overall inequality obtained from the Theil index is considered. Results indicate that inequality has a positive and significant effect on per capita income growth. However, the magnitude of the inequality effect is not stable across regions. Geographically Weighted Regression estimates show that the magnitude of the inequality growth relationship varies over a range of 0.72 to 3.36. Other results are also noteworthy in this study. Per capita income grows faster in provinces that contribute more to the overall inequality. Provinces with higher poverty incidence tend to grow less and human capital appears to be a significant booster to per capita income growth. Additionally, urban provinces tend to grow faster than the rural ones.
    Keywords: clusters, growth, inequality, spatial econometrics, Community/Rural/Urban Development, Research Methods/ Statistical Methods, R11, R12, O15, C21,
    Date: 2012
  19. By: Salih, Thamir M.
    Abstract: For the period between 1957 and 1997, Malaysia’s development is analysed to determine the roles of inputs, planning, trade and government intervention in economic activity. Foreign investment is also analysed. During this period, by international standards, growth that Malaysia experienced was impressive. This growth was achieved through a policy framework that used government planning and investment in conjunction with incentives for the private sector. A unique feature of Malaysia’s planning was its call for social justice to advance the economic interest of its less economically privileged population. By adopting amalgam of development strategies and policies, policymakers were successful in improving the socio-economic status of the majority of the Malaysian population.
    Keywords: Economic Development, Export, Growth, Investment, Planning, Sustainability, Country Studies: Malaysia., Agricultural and Food Policy, International Relations/Trade,
    Date: 2012
  20. By: Stanisic, Nenad
    Abstract: There are various benefits which countries could derive from the renouncement of a national currency hallmarked by unstable external and internal values. The most evident one is the reduction of a long-term inflation rate. The objective of this paper is to test the hypothesis of the positive influence which monetary integration exerts on monetary stability and economic growth. On the other hand, monetary integration can also cause certain economic problems to countries economies, such as the one of the balance-of-payments adjustment. Hence this paper surveys its influence on the current account balance of national economies. The hypotheses are tested empirically by examining the sample of 42 countries from different regions and of different development levels. The results suggest that the monetary integration influences the inflation reduction in developing countries, but not the achieved economic growth rates. At the same time, the results indicate that monetary integration contributes to an increase in the current account deficit of developing countries, but not of developed ones.
    Keywords: international monetary integration; economic growth; inflation; current account
    JEL: F15 E31 F41 F31
    Date: 2012–02–06
  21. By: Bilge Erten
    Abstract: This paper analyzes the robustness of emerging economies growth performance to a number of external demand shocks using a Bayesian vector autoregressive (BVAR) model with informative priors on the steady state. Using quarterly data from 1993 to 2011 for global financial conditions and external demand variables, it examines the magnitude of the shocks from a deepening Eurozone recession on China, emerging Asia, and emerging Latin America, and the factors that influence the transmission of these shocks. It finds that more than fifty percent of the variation in real GDP growth of Latin American emerging economies is explained by external factors, while it is slightly less than fifty percent for emerging Asia and China. Conditional forecasts of different scenarios indicate that a deepening of the Eurozone recession would create a severe and persistent contraction for emerging economies, depending on the response of the U.S. growth to this shock. Finally, forecasts suggest that a sharp slowdown in China’s growth would have a significant negative impact on emerging economies’ growth, and that the Latin American countries would be more severely hit than the Asian ones.
    Keywords: Eurozone recession, transmission of shocks, Bayesian vector autoregression, emerging economies, growth spillovers
    JEL: F43 F44 F47
    Date: 2012–06

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