nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒07‒23
eleven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. GDP volatility before and after the euro : the evidence By Jaime Luque; Abderrahim Taamouti
  2. Foreign lending, local lending, and economic growth By Owen, Ann L.; Temesvary, Judit
  3. Inflation and Growth: a New Keynesian Perspective By Robert Amano; Tom Carter; Kevin Moran
  4. A Numerical Evaluation on a Sustainable Size of Primary Deficit in Japan By Real Arai; Junji Ueda
  5. Engines of growth: Education and innovation By Stadler, Manfred
  6. What is new in the finance-growth nexus: OTC derivatives, bank assets and growth By Becchetti, Leonardo; Ciampoli, Nicola
  7. The effect of female and male health on economic growth: cross-country evidence within a production function framework By Hassan, Gazi; Cooray , Arusha
  8. Growth rates constrained by internal and external imbalances and the role of relative prices: Empirical evidence from Portugal By Elias Soukiazis; Pedro André Cerqueira; Micaela Antunes
  9. Some Quantitative Estimates of the Influence of Institutional Constraints of Economic Growth in Russia By Alexey Vedev; Andrey Kosarev
  10. Sovereign country rating, growth volatility and financial crisis By Hassan, Gazi; Wu, Eliza
  11. Is health wealth? Results of a panel data analysis By Dutta, Mousumi; Husain, Zakir; Chowdhary, Nidhi

  1. By: Jaime Luque; Abderrahim Taamouti
    Abstract: The message in this note is that the adoption of the Euro has changed the effect of Eurozone countries’ economic fundamentals on per capital Gross Domestic Product (GDPpc) growth rate volatility (economic uncertainty). Increments in government debt significantly decreased GDPpc growth rate volatility before the Euro, but increased it after. The other fundamentals exhibit less structural change on economic uncertainty. These stylized facts are robust to different measures of GDPpc growth rate volatility and to the exclusion of the recent financial crisis period, and are specific to the Eurozone countries in Europe.
    Keywords: GDPpc growth rate volatility, Euro, Eurozone countries, Economic uncertainty, Government debt, Economic fundamentals
    JEL: E02 E52 F00 F02 F15 F33 F34 F36 F42
    Date: 2012–07
  2. By: Owen, Ann L.; Temesvary, Judit
    Abstract: Recent research has shown that there is significant cross-country heterogeneity in the previously well-established relationship of finance and long-run growth. We explore this heterogeneity by estimating finite mixture models and by considering the effects of foreign and domestic lending separately. We find that bank lending does not have the same effect on growth or savings in all countries. Country characteristics such as the extent of stock market development, the degree of rule of law, and even the development of the banking sector itself vary considerably across countries and affect the productivity of bank lending in encouraging growth and savings. Furthermore, the effect of bank finance on growth and the effect of foreign bank involvement depend on 1) how well developed the banking sector is, and 2) if foreign banks are involved via loans made by affiliates located within the country or via cross-border loans. The experience of lenders with a presence in the country is important, but only once a threshold level of financial sector development is reached. In countries with underdeveloped banking sectors, the influence of foreign-owned lenders relative to locally-owned banks can be detrimental to growth.
    Keywords: finance and growth; finite mixture models; cross-border lending
    JEL: F43 O4
    Date: 2012–06
  3. By: Robert Amano; Tom Carter; Kevin Moran
    Abstract: The long-run relation between growth and inflation has not yet been studied in the context of nominal price and wage rigidities, despite the fact that these rigidities now figure prominently in workhorse macroeconomic models. We therefore integrate staggered price- and wage-setting into an endogenous growth framework. In this setting, growth and inflation are linked via the incentive to innovate. For standard calibrations, the linkage is strong: as trend inflation shifts from -5 to 5 percent, the range over which the economy’s steady-state growth rate varies spans 50 basis points, implying up to a 15 percent output differential after thirty years. Nominal wage rigidity plays a critical role in generating these results, and compounding of inflation’s growth effects implies large welfare losses. Endogenous growth thus proves a key channel via which inflation impacts New Keynesian economies.
    Keywords: Non-superneutrality, endogenous growth, welfare costs of inflation
    JEL: E31 E52 O31 O42
    Date: 2012
  4. By: Real Arai (Graduate School of Social Sciences, Hiroshima University); Junji Ueda (Policy Research Institute, the 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
  5. By: Stadler, Manfred
    Abstract: The paper presents a dynamic general-equilibrium model of education, quality and variety innovation, and scale-invariant growth. We consider endogenous humancapital accumulation in an educational sector and quality and variety innovation in two separate R&D sectors. In the balanced growth equilibrium education and innovation appear as in-line engines of growth and government can accelerate growth by subsidizing education or by enhancing the effectiveness of the educational sector. --
    Keywords: education,quality and variety innovation,scale-invariant growth
    JEL: O2 O3
    Date: 2012
  6. By: Becchetti, Leonardo (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Ciampoli, Nicola (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)
    Abstract: We investigate the finance-growth nexus before and around the global financial crisis using for the first time OTC derivative data in growth estimates. Beyond the most recent Wacthel and Rousseau (2010) evidence which documents the interruption of the positive finance-growth relationship after 1989, we show that bank assets contribute indeed negatively, while OTC derivative positively or insignificantly with a much smaller effect in magnitude. At the same time the impact of the crisis is captured by a very strong negative effect of year dummies around the event. Our findings and their discussion aim to provide insights for policy measures aimed at tackling the crisis, disentangling positive from negative effects of derivatives and bank activity on the real economy and restoring the traditional positive link between finance and growth.
    Keywords: finance and growth; OTC derivatives; banking; global financial crisis
    JEL: E44 G10 O40
    Date: 2012–06–27
  7. By: Hassan, Gazi; Cooray , Arusha
    Abstract: It is widely believed by development economists that the role of human capital is one of the most fundamental determinants of economic growth. Sustained growth depends on the level of human capital whose stocks increase due to better education, higher levels of health, new learning and training procedure. The intuition that good health raises the level of human capital and has a positive effect on productivity and economic growth has been modelled by enodogenous growth theorists. But empirically ascertaining the causal relationship between health and growth is more difficult due to the possible existence of endogeneity between these two variables. We use a production function based approach and model the role of health as a regular factor of production. Additionally, we depart from all the previous literature by estimating the gender disaggregated effect of human health on economic growth. We adopt a constant return to scale production function that fits the data in the microeconometric literature on return to human capital. Using this particular production function, we disaggregate the measures of human capital by including male and female life expectancy and school enrolments. Allowing for the dynamics of TFP to be embedded in the production function we empirically test it in growth form using various estimators appropriate for our data. Our main finding is that male life expectancy has a positive effect on the growth of income while female life expectancy has a negative effect, controlling for unobserved time and country effects in a panel of 83 countries from 1960 - 2009. We use lag differences of life expectancy and school enrolments and lagged growth rates of other inputs as instruments for controlling the endogenity of health in the growth regressions. We check for the robustness of the results with use of ‘deletion diagnostics’ to identify influential observations and outliers. The results continue to show that male life expectancy has a positive effect on income growth while that of female has a negative effect.
    Keywords: Health and economic development; economic growth; endogeneity; panel data; TFP; convergence; economics of gender
    JEL: O47 I12 J16
    Date: 2012–02–01
  8. By: Elias Soukiazis (Faculty of Economics, University of Coimbra and GEMF); Pedro André Cerqueira (Faculty of Economics, University of Coimbra and GEMF); Micaela Antunes (Department of Economics, Business and Industrial Engineering)
    Abstract: Thirlwall’s Law (Thirlwall 1979) considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. Recently, Soukiazis E., Cerqueira P., and Antunes M. (2012) developed a model – hereafter the SCA model - that takes into account both internal and external imbalances but where relative prices do not play any role on the pace of economic growth. The aim of this paper is to extend the SCA model by relaxing this assumption and introducing explicitly relative prices in it. The model is tested for Portugal which recently fell into a public debt crisis with serious negative consequences on growth. It is shown that our new model makes a significant improvement in predicting actual growth in Portugal. Our empirical analysis reveals that policies aiming at reducing internal and external imbalances and financing public debt with lower cost will help the country to grow faster.
    Keywords: Internal and External Imbalances, Price and Income Elasticities of External Trade, Equilibrium Growth Rates, 3SLS System Regressions.
    JEL: C32 E12 H6 O4
    Date: 2012–07
  9. By: Alexey Vedev (Gaidar Institute for Economic Policy); Andrey Kosarev (Gaidar Institute for Economic Policy)
    Keywords: : business climate, economic growth,
    Date: 2012
  10. By: Hassan, Gazi; Wu, Eliza
    Abstract: Using monthly data from January 1996 up to May 2010 for a panel of 76 developed and emerging economies and adopting an instrumental variable estimation technique by correcting for both heterogeneity and endogeneity (correlation between the regressors and the idiosyncratic error) using the generalized two-stage least squares (G2SLS, EC2SLS) procedure method suggested by Balestra and Varadharajan-Krishnakumar (1987) and Baltagi (1995), this paper provides empirical evidence that an alternative channel via which growth volatility is reduced is through changes in sovereign country ratings. The paper also provides a new insight on the effect of global financial crisis (GFC) that it has contributed towards increased macroeconomic volatility by weakening this volatility reducing effect of sovereign country rating. Finally acknowledging the simultaneity between rating and volatility where output volatility may be a determining factor for sovereign country rating, the paper adopts a system approach and uses three stage least square (3SLS) estimator and finds that volatility reducing effect of country credit rating is robust. The channel via which sovereign rating changes affect growth volatility is through sovereign credit default swap (CDS) spread and its volatility.
    Keywords: Growth volatility; sovereign country rating; global financial crisis; monetary policy; G2SLS; EC2SLS; 3SLS
    JEL: C5 E52 C33
    Date: 2012–06–02
  11. By: Dutta, Mousumi; Husain, Zakir; Chowdhary, Nidhi
    Abstract: The objective of this paper is to determine whether health (measured by life expectancy at birth) contributes to economic growth and the functional form in which it influences per capita income. This links our study to the debate between Neo-classical and endogenous growth theorists on whether investment in human capital can sustain growth indefinitely. Data on 216 countries for the period 1980-2009 has been obtained from World Development Indicators dataset. This enables us to focus on a period characterized by globalization and demographic changes manifested in the form of population graying. Our findings confirm the importance of investment in human capital. But, in contrast to conclusions of endogenous growth models, we find evidence that benefit from increasing longevity tapers off. We conclude by pointing out that it is necessary to extend this study further by incorporating other dimensions of health that are not captured by life expectancy.
    Keywords: Life expectancy at birth; endogenous growth models; Neo-classical growth models; panel data; human capital
    JEL: C33 O40 I10
    Date: 2012–07–09

This nep-fdg issue is ©2012 by Iulia Igescu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.