nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒07‒29
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Reassessing the impact of finance on growth By Stephen Cecchetti; Enisse Kharroubi
  2. Intangible Capital and Growth in Advanced Economies: Measurement Methods and Comparative Results By Corrado, Carol; Haskel, Jonathan; Jona-Lasinio, Cecilia; Iommi, Massimiliano
  3. Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems By Beck, T.H.L.; Degryse, H.A.; Kneer, E.C.
  4. Inter-Regional Spillovers and Urban-Rural Disparity in U.S. Employment Growth By Hisamitsu Saito; Munisamy Gopinath; JunJie Wu
  5. Inflation and Growth: A New Keynesian Perspective By Robert Amano; Tom Carter; Kevin Moran
  6. The joint effect of demographic change on growth and agglomeration By Theresa Grafeneder-Weissteiner
  7. What is New in the Finance-growth Nexus: OTC Derivatives, Bank Assets and Growth By Leonardo Becchetti; Nicola Ciampoli
  8. UK Innovation Index: Productivity and Growth in UK Industries By Goodridge, Peter; Haskel, Jonathan; Wallis, Gavin
  9. Intangible Capital and Growth in Advanced Economies: Measurement and Comparative Results By Corrado, Carol; Haskel, Jonathan; Iommi, Massimiliano; Jona-Lasinio, Cecilia

  1. By: Stephen Cecchetti; Enisse Kharroubi
    Abstract: This paper investigates how financial development affects aggregate productivity growth. Based on a sample of developed and emerging economies, we first show that the level of financial development is good only up to a point, after which it becomes a drag on growth. Second, focusing on advanced economies, we show that a fast-growing financial sector is detrimental to aggregate productivity growth.
    Keywords: Growth, financial development, credit booms, R&D intensity, financial dependence
    Date: 2012–07
  2. By: Corrado, Carol (The Conference Board); Haskel, Jonathan (Imperial College London); Jona-Lasinio, Cecilia (ISTAT, Rome); Iommi, Massimiliano (ISTAT, Rome)
    Abstract: We present a harmonized data set on intangible investment for a number of EU countries and an analysis of growth.
    Keywords: growth, intangible investment
    JEL: O47
    Date: 2012–07
  3. By: Beck, T.H.L.; Degryse, H.A.; Kneer, E.C. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Financial systems all over the world have grown dramatically over recent decades. But is more finance necessarily better? And what concept of finance – the size of the financial sector, including both intermediation and other auxiliary “non-intermediation†activities, or a focus on traditional intermediation activity – is relevant for its impact on real sector outcomes? This paper assesses the relationship between the size of the financial system and the degree of intermediation, on the one hand, and GDP per capita growth and growth volatility, on the other hand. Based on a sample of 77 countries for the period 1980-2007, we find that intermediation activities increase growth and reduce volatility in the long run. An expansion of the financial sectors along other dimensions has no long-run effect on real sector outcomes. Over shorter time horizons a large financial sector stimulates growth at the cost of higher volatility in high-income countries. Intermediation activities stabilize the economy in the medium run especially in low-income countries.
    Keywords: Financial intermediation;economic growth;growth volatility.
    JEL: G2 O4
    Date: 2012
  4. By: Hisamitsu Saito; Munisamy Gopinath; JunJie Wu
    Abstract: A wide urban-rural disparity is observed in employment growth in the United States. For example, employment growth averaged 2.1 percent in urban counties during 1998-2007, compared with just 1 percent in rural counties. In this study, we examine the sources of U.S. employment growth using the county-level industry data. From an analytical labor-market model, we derive equilibrium employment growth as a function of growth in neighborhood characteristics and initial conditions such as accumulated of human capital, industrial structure and natural amenities. The equilibrium employment growth equation is then estimated using spatial econometric techniques, which account for spillovers from employment growth in neighboring counties. Specifically, a spatial lag model is estimated using U.S. county and industry data from 1998-2007. Results show positive growth spillovers from both urban and rural regions, but the former has relatively large impacts on regional employment growth. The statistical significance of the spatial-lag coefficient in most U.S. manufacturing and service industries suggests the presence of a strong spatial multiplier effect. Evaluating the contribution of alternative factors to employment growth, we find that initial accumulated human capital is the key determinant of regional employment growth. The decomposition of the urban-rural gap in employment growth shows spillovers from urban (rural) regions widen (narrow) the gap. The latter suggests that collaboration among rural regions in economic development can be effective in narrowing the urban-rural gap in employment growth.
    Date: 2011–09
  5. 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. <P>
    Keywords: non-superneutrality, endogenous growth, welfare costs of inflation,
    JEL: E31 E52 O31 O42
    Date: 2012–07–01
  6. By: Theresa Grafeneder-Weissteiner
    Abstract: Recently, there has been wide interest in the “economics” of population aging. Demographic change has crucial consequences for economic behavior; it e.g. implies that consumption and investment decisions vary over the life-cycle. The latter has important implications for economic growth, whereas the former is decisive for the location of economic activity as emphasized in the New Economic Geography (NEG) literature. Both growth and agglomeration processes are, however, themselves interlinked, since technological spillovers, being the engines of endogenous growth, are often localized. This linkage has inspired the development of frameworks that combine (endogenous) growth features with NEG models to study the joint process of creation and location of economic activity. All these models focus, however, on the consequences of increased economic integration while ignoring any potential effect of demographic change. This paper closes the gap by incorporating an overlapping generation structure into Baldwin (2001) 's NEG model with learning spillovers and thus allows to investigate how lifetime uncertainty impacts upon growth and agglomeration. The main results are twofold. First, nonzero mortality rates support a more equal distribution of productive factors by introducing an additional dispersion force that countervails the agglomeration tendencies resulting from endogenous growth through localized knowledge spillovers. For sufficiently high interregional knowledge spillovers, the turnover of generations can even prevent regions from unequal development. Moreover, lifetime uncertainty considerably reduces the possibility of agglomeration being the result of a self-fulfilling prophecy. Second, nonzero mortality rates lower both the symmetric equilibrium's as well as the core-periphery's growth rate. As long as learning spillovers are not purely localized, this decrease is, however, more pronounced for the core-periphery outcome. Thus, in sharp contrast to standard NEG findings, agglomeration is not necessarily conducive to growth. This also implies that there might not be any trade-off between fostering an equal distribution of productive factors and high economic growth which would result from e.g. increased economic integration if agglomeration were unambiguously pro-growth. Baldwin, R. E., Martin, P., and Ottaviano, G. I. P. (2001). Global income divergence, trade, and industrialization: The geography of growth take-offs. Journal of Economic Growth, 6:5-37.
    Date: 2011–09
  7. By: Leonardo Becchetti (Faculty of Economics, University of Rome "Tor Vergata"); Nicola Ciampoli (Faculty of Economics, University of Rome "Tor Vergata")
    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: 2012–07–20
  8. By: Goodridge, Peter; Haskel, Jonathan; Wallis, Gavin
    Abstract: This paper provides an update of the NESTA Innovation Index and tries to calculate some facts for the 'knowledge economy'. Building on the work of Corrado, Hulten and Sichel (CHS, 2005,9), using new data sets and a new micro survey, we (1) document UK intangible investment and (2) see how it contributes to economic growth. Regarding investment in knowledge/intangibles, we find (a) this is now 34% greater than tangible investment, in 2009, £124.2bn and £92.7bn respectively; (b) that R&D is about 11% of total intangible investment, software 18%, design 12%, and training and organizational capital 21% each; (d) the most intangible-intensive industry is manufacturing (intangible investment is 17% of value added) and (e) treating intangible expenditure as investment raises market sector value added growth in the 1990s due to the ICT investment boom, but has less impact on aggregate measures of growth in the 2000s. Regarding the contribution to growth, for 2000-09, (a) intangible capital deepening accounts for 26% of labour productivity growth, against computer hardware and telecommunications equipment combined (16%) and TFP (-0.4%); (b) adding intangibles to growth accounting lowers TFP growth by about 18 percentage points (c) capitalising R&D adds 0.04% to input growth and reduces ΔlnTFP by 0.02% and (d) manufacturing accounts for 47% of intangible capital deepening plus TFP.
    Keywords: growth; innovation; intangibles
    Date: 2012–07
  9. By: Corrado, Carol; Haskel, Jonathan; Iommi, Massimiliano; Jona-Lasinio, Cecilia
    Abstract: Conventional measures of business investment consist primarily of tangible assets such as plant and equipment, vehicles, office buildings and other commercial structures. Corrado, Hulten and Sichel (2005, 2009) show business investment in intangibles (software, design, R&D, branding, organizational capital) exceeds tangible investment for the United States. This paper presents a harmonized data set and analysis of intangible investment, 1995-2009, for the EU27, Norway and the US, and growth accounts including intangible capital for 14 countries. We find (a) intangible investment in the EU is less than the US, but the share of intangible investment in GDP has been growing faster than the share of tangible (b) between 1995 and 2007 capital deepening accounted for almost 50% of growth in the EU and 65% in the US, with intangible investment contributing around half of capital deepening (c) higher rates of intangible capital deepening are associated with higher TFP growth, consistent with spillovers from intangibles.
    Keywords: growth; intangibles; investment
    JEL: O47 O57
    Date: 2012–07

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