nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒07‒08
sixteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Is energy consumption effective to spur economic growth in Pakistan? new evidence from bounds test to level relationships and Granger causality tests By Muhammad, Shahbaz; Muhammad, Zeshan; Talat, Afza
  2. Status-seeking and economic growth: the Barro model revisited. By Thi Kim Cuong Pham
  3. International Financial Integration and Economic Growth: New Evidence on Threshold Effects By Jinzhao Chen; Thérèse Quang
  4. Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies By Laura Jaramillo; Carlo Cottarelli
  5. Immigration and Economic Growth: Do Origin and Destination Matter? By Kang, Youngho; Kim, Byung-Yeon
  6. The Role of Agriculture on the Recent Brazilian Economic Growth By Spolador, Humberto Francisco Silva; Roe, Terry L.
  7. Innovative and absorptive capacity effects of education in a small open economy By Brita Bye and Taran Fæhn
  8. Study of Economic Globalization and Growth of Agricultural Sector of Iran By Nabieyan, Sedigheh; Satrasala, Suryaprakash
  9. Economic growth and welfare state: a debate of econometrics By DING, HONG
  10. Enabling Growth and Promoting Equity in the Global Financial Crisis Risk and Vulnerability: A view from COPLA works on SMEs By Perez, Francisco Jose
  11. As You Sow So Shall You Reap: Public Investment Surges, Growth, and Debt Sustainability in Togo By Raphael A. Espinoza; Michal Andrle; Marshall Mills; Luis-Felipe Zanna; Antonio David
  12. Debt and nonlinear fiscal policy: evidence from the states By Gray, Jo Anna; Stone, Joe A,
  13. Microinsurance in Brazil, Colombia, Mexico, and Peru By Sheirin Iravantchi; Mark D. Wenner
  14. Bounded Leviathan: or why North & Weingast are only right on the right half By Irigoin, A; Grafe, R
  15. Real-time forecasting US GDP from small-scale factor models By Maximo Camacho; Jaime Martinez-Martin
  16. Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces By Edward F. Buffie; Rafael Portillo; Luis-Felipe Zanna; Catherine A. Pattillo; Andrew Berg

  1. By: Muhammad, Shahbaz; Muhammad, Zeshan; Talat, Afza
    Abstract: The present study investigates the relationship between energy (renewable and nonrenewable) consumption and economic growth using Cobb-Douglas production function in case of Pakistan over the period of 1972-2011. We have used ARDL bounds testing and Gregory and Hansen (1990) structural break cointegration approaches for long run while stationarity properties of the variables are tested applying Clemente-Montanes-Reyes (1998) structural break unit root test. Our results confirm cointegration between renewable energy consumption, nonrenewable energy consumption, economic growth, capital and labor in case of Pakistan. The findings show that both renewable and nonrenewable energy consumption add to economic growth. Capital and labour are also important determinants of economic growth. The VECM granger causality analysis validates the existence of feedback hypotheses between renewable energy consumption and economic growth, nonrenewable energy consumption and economic growth, economic growth and capital.
    Keywords: Energy Consumption; Economic Growth; Pakistan
    JEL: O4 Q4
    Date: 2012–06–15
  2. By: Thi Kim Cuong Pham
    Abstract: This paper reexamines the Barro growth model taking into account status-seeking behavior. Agents care about both consumption and social status, which is determined by their relative consumption in society. Public capital as production input is financed by income tax or lumpsum tax. We discuss different measures to reach the optimal growth and optimal welfare in a decentralized economy and find that under some parameter conditions, there are some government sizes for which the decentralized growth is optimal, and this result does not require corrective taxation policy. We also find the superiority of income tax versus lump-sum tax from the point of view of optimal growth in a decentralized economy and of social welfare. Besides, we propose corrective tax programs with constant capital tax or subsidy and time-varying consumption tax that enable an economy to reach the first-best optimal growth. The extension to a congestion model modifies somewhat the results. We discuss conditions under which the first-best or the secondbest optimal growth is attained in a decentralized economy.
    Keywords: Corrective tax, endogenous growth, public expenditure, relative consumption, status-seeking.
    JEL: D90 H21 H50 O41
    Date: 2012
  3. By: Jinzhao Chen (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Thérèse Quang (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)
    Abstract: Recent research highlights that countries differ with respect to their experience with capital flows and do not systematically gain from capital account liberalization. This paper is related to the empirical literature that investigates the particular conditions under which international financial integration (IFI) is growth-enhancing. Relying on non-linear panel techniques, we find that countries that are able to reap the benefits of IFI satisfy certain threshold conditions regarding the level of economic, institutional and financial development, and the inflation rate. Our results also reveal a differentiated behaviour of foreign direct investment and portfolio liabilities compared to debt liabilities.
    Keywords: International financial integration ; Economic growth ; Panel threshold regression model
    Date: 2012–06
  4. By: Laura Jaramillo; Carlo Cottarelli
    Abstract: Implementation of fiscal consolidation by advanced economies in coming years needs to take into account the short and long-run interactions between economic growth and fiscal policy. Many countries must reduce high public debt to GDP ratios that penalize longterm growth. However, fiscal adjustment is likely to hurt growth in the short run, delaying improvements in fiscal indicators, including deficits, debt, and financing costs. Revenue and expenditure policies are also critical in affecting productivity and employment growth. This paper discusses the complex relationships between fiscal policy and growth both in the short and in the long run.
    Keywords: Developed countries , Economic growth , Fiscal consolidation , Fiscal policy ,
    Date: 2012–05–25
  5. By: Kang, Youngho; Kim, Byung-Yeon
    Abstract: This paper assesses the heterogeneous effects of immigration on economic growth depending on both the origin and the destination countries. Following the development of a simple growth model augmented by the embodied human capital of immigrants, we estimate the growth equation using a gravity-style instrument variable approach and the dynamic system-GMM estimator. We find that immigration from developed economies positively affects the economic growth of the host countries. Furthermore, the growth-enhancing effect of immigration is significantly larger when immigration flows from developed to developing economies than when it does to those that include both developed and developing economies. We interpret these results as evidence of immigrants from developed countries bringing with them – upon entry – their advanced knowledge on technology and institutions into the developing countries that host them.
    Keywords: International migration;Economic Growth;
    JEL: F22 C23 J61 O40
    Date: 2012–06–27
  6. By: Spolador, Humberto Francisco Silva; Roe, Terry L.
    Abstract: This paper investigates the contribution of the Brazilian agriculture to economic growth of the Brazilian economy. It draws upon the Global Trade Analysis Project (GTAP) data base, and other time series data to construct a multi-sector Ramsey model that shows the transition growth of the Brazilian agricultural sector and its effects on growth of the Brazilian economy, with particular emphasis given to the years 1994–2010.
    Keywords: Agriculture, economic growth, macroeconomics variables, Agribusiness, Agricultural and Food Policy, O10, O11, Q1,
    Date: 2012
  7. By: Brita Bye and Taran Fæhn (Statistics Norway)
    Abstract: Evidence points to relatively low supply elasticities for workers skilled for research and development (R&D), which can hamper innovation and growth. Increasing the supply of R&D skills will expand an economy's innovative capacity. A simultaneous effect of increased education, which is particularly important for small, open economies, is to raise final goods producers’ capacity to absorb cross-border knowledge spillovers. In a calibrated endogenous growth model for Norway, we find that increasing the share of highly educated workers has pronounced absorptive capacity effects that partially crowd out R&D-based innovation. Both innovative and absorptive capacity expansions contribute to higher growth and welfare.
    Keywords: Absorptive capacity; Computable general equilibrium model; Endogenous growth; Human capital; Innovation; Research and Development
    JEL: O30 O41
    Date: 2012–06
  8. By: Nabieyan, Sedigheh; Satrasala, Suryaprakash
    Abstract: After an inward-looking strategy during the Iran-Iraq war (1980-1988), Iran has moved towards a more liberalized and open market structure. So this paper studied the effect of the process of economic globalization on agricultural sector of Iran. Sinha’s growth model was used to estimate the relationship between globalization factors and growth in agricultural sector. The stationarity of variables, Engle-Granger’s causal relationships and co-integration relationship between variables were determined. An error correction framework was applied to capture the short-run and the long-run dynamic in the growth model. Opened economy could be a cause of investing in agricultural sector, and agricultural investment could be cause of openness. No long-run equilibrium relationship observed between FDI and agricultural value addition and between FDI and agricultural investment. Openness would increase investment and growth in agricultural sector. Agricultural growth was observed to be based on labour than the investment in short-run, whereas in long-run it is mostly based on investment.
    Keywords: Engle-Granger’s causal relationships, Error correction model and Globalization, International Relations/Trade, Public Economics, Research Methods/ Statistical Methods,
    Date: 2012
  9. By: DING, HONG
    Abstract: This study uses a two-way fixed effect model for panel data of all OECD nations, which includes most of the determinants of growth in previous empirical growth studies for either cross section or panel data as control variables and carefully checks possible endogeneity of the key variables of interest: welfare measures by Durbin-Wu-Hausman test. The empirical analysis shows a robust negative correlation between welfare spending rate, tax-to-GDP ratio and GDP growth. In particular, the estimates suggest that a 1% increase in welfare spending as percentage of GDP would increase the per capita GDP growth rate by 0.19%. Among three biggest components of welfare expenditure, pension spending is identified as the most important source of detrimental effect on growth while income support and public health expenditure are found to have no significant impact on growth. I also find that a 1% increase in tax revenue-to-GDP ratio would increase the per capita GDP growth rate by 0.18%. Since this estimate is close to that of welfare spending rate and welfare spending is only part of tax revenue used by government, it implies that decreasing welfare expenditure is more important and more effective for promoting growth than cutting tax. All results are subject to robustness checks including unit root test for panel data, slope poolability test, dependent variable persistence test, informal check of IV exogeneity and serial correlation test.
    Keywords: welfare state; economic growth; endogeneity; Durbin-wu-hausman test;
    JEL: I38 H53 O4
    Date: 2012–06–20
  10. By: Perez, Francisco Jose
    Abstract: The paper aims for enabling growth and promoting equity in the global financial crisis risk and vulnerability. It shows the internal factors, rules of engagement and the global financial crisis impacts.
    Keywords: SMES, Poverty, Global Financial Crisis, Community/Rural/Urban Development, Financial Economics, G15, R11, I:32.,
    Date: 2012
  11. By: Raphael A. Espinoza; Michal Andrle; Marshall Mills; Luis-Felipe Zanna; Antonio David
    Abstract: This paper presents an analysis of the public investment scaling-up strategy for Togo using a dynamic macroeconomic model that explicitly analyzes the links between public investment, economic growth, and debt sustainability. In the model, public capital is productive and complementary to private capital, generating positive medium and long-run effects to increases in public investment. The model application indicates that a very large increase in public investment would have positive macroeconomic effects in the long-run, but would require unrealistic increases in the tax burden to cover recurrent costs and ensure debt sustainability. More modest increases in public investment would require more feasible increases in the tax burden, particularly if the efficiency of tax collection is improved. The model simulations also emphasize the importance of improvements in the efficiency of public investment to reap welfare gains. However, even if the macroeconomic implications of public investment scaling-up can be favorable in the long-run under certain assumptions on rates of return and efficiency of investment, the transition period is challenging and exposes the country to increased risk of unsustainable debt dynamics. The model was also used to assess the growth projections underlying the standard Excel-based debt sustainability analysis for Togo.
    Keywords: Debt sustainability , Economic growth , Economic models , Fiscal policy , Infrastructure , Public investment , Tax burdens ,
    Date: 2012–05–16
  12. By: Gray, Jo Anna; Stone, Joe A,
    Abstract: Evidence from a half century of experience by states identifies nonlinearities in the effects of debt and fiscal policy on growth. Effects are Keynesian for low to moderate levels of debt and stimulus but anti Keynesian for sufficiently high levels of debt or stimulus. Results are broadly consistent with models by Barro (1999), Judd (1987), and others.
    Keywords: debt; fiscal policy; nonlinear;growth; Keynes
    JEL: E62 B22 A10
    Date: 2012–06–06
  13. By: Sheirin Iravantchi; Mark D. Wenner
    Abstract: The microinsurance market in Latin America is still in its embryonic phase. The purpose of this technical note is to better inform donors, national governments, and insurance companies interested in promoting financial inclusion about how they can accelerate the development of microinsurance markets. Four countries -Brazil, Colombia, Mexico, and Peru- are reviewed to glean lessons learned about paths taken to develop these markets and the interaction of key stakeholders.
    Keywords: Financial Sector :: Financial Markets, Financial Sector :: Financial Services, Economics :: Economic Development & Growth, financial inclusion
    JEL: G22 G28 O57
    Date: 2012–06
  14. By: Irigoin, A; Grafe, R
    Abstract: ‘Constitutions and Commitments” has inspired the economic literature on the importance of “Legal origins” (LaPorta et al., 1998, 2008), which vindicates the notion that post-Glorious Revolution English institutions were particularly conducive to economic growth. More recently economists have acknowledged that growth in fact depends on “state capacity”. This encompasses not only investor protection (legal capacity) but also the ability of the state to finance itself, “fiscal capacity”.(Besley and Persson, 2009, 2010) show that the protection of private property rights and that of public property rights to taxation are linked and most likely co-evolutionary. However, the precise relation between the two is anything but clear. This paper argues that North and Weingast’s model’s one-sided focus on state coercion that threatened subjects’ property rights has obscured the relation between coercion used in revenue collection and total revenue role of fiscal capacity. We suggest a very simple model to show that this relationship between state fiscal capacity and legal capacity is not linear, especially in the phase of nation state building. The case of Spain provides empirical evidence for the existence of states were an increase in coercion would have improved fiscal capacity, but high levels of legal capacity paradoxically prevented the ruler from adopting this path. We use financial market developments to show the serious welfare implications that resulted from such a lack of coordination and integration.
    Keywords: 'Constitution & Commitment'; 'legal origins'; 'state capacity'; 'fiscal capacity'
    JEL: E02 K0 N0 E44 E6 P48
    Date: 2012–06–24
  15. By: Maximo Camacho; Jaime Martinez-Martin
    Abstract: This paper proposes two refinements to the single-index dynamic factor model developed by Aruoba and Diebold (AD, 2010) to monitor US economic activity in real time. First, we adapt the model to include survey data and financial indicators. Second, we examine the predictive performance of the model when the goal is to forecast GDP growth. We find that our model is unequivocally the preferred alternative to compute backcasts. In nowcasting and forecasting, our model is able to forecast growth as well as AD and much better than several baseline alternatives. In addition, we find that our model could be used to predict more accurately the US business cycles.
    Keywords: real-time forecasting, US GDP, business cycles.
    JEL: E32 C22 E27
    Date: 2012–06
  16. By: Edward F. Buffie; Rafael Portillo; Luis-Felipe Zanna; Catherine A. Pattillo; Andrew Berg
    Abstract: We develop a model to study the macroeconomic effects of public investment surges in low-income countries, making explicit: (i) the investment-growth linkages; (ii) public external and domestic debt accumulation; (iii) the fiscal policy reactions necessary to ensure debt-sustainability; and (iv) the macroeconomic adjustment required to ensure internal and external balance. Well-executed high-yielding public investment programs can substantially raise output and consumption and be self-financing in the long run. However, even if the long run looks good, transition problems can be formidable when concessional financing does not cover the full cost of the investment program. Covering the resulting gap with tax increases or spending cuts requires sharp macroeconomic adjustments, crowding out private investment and consumption and delaying the growth benefits of public investment. Covering the gap with domestic borrowing market is not helpful either: higher domestic rates increase the financing challenge and private investment and consumption are still crowded out. Supplementing with external commercial borrowing, on the other hand, can smooth these difficult adjustments, reconciling the scaling up with feasibility constraints on increases in tax rates. But the strategy may be also risky. With poor execution, sluggish fiscal policy reactions, or persistent negative exogenous shocks, this strategy can easily lead to unsustainable public debt dynamics. Front-loaded investment programs and weak structural conditions (such as low returns to public capital and poor execution of investments) make the fiscal adjustment more challenging and the risks greater.
    Date: 2012–06–05

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