nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒08‒23
twenty papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Patents versus R&D subsidies in a Schumpeterian growth model with endogenous market structure By Chu, Angus C.; Furukawa, Yuichi
  2. Does Trust Promote Growth? By Roman Horváth
  3. Monetary policy and endogenous market structure in a Schumpeterian economy By Chu, Angus C.; Ji, Lei
  4. Inflation and Growth: A New Keynesian Perspective By Robert Amano; Tom Carter; Kevin Moran
  5. Business Cycles and Financial Crises: A Model of Entrepreneurs and Financiers By Kunieda, Takuma; Shibata, Akihisa
  6. Growth and welfare effects of health care in knowledge based economies By Michael Kuhn; Klaus Prettner
  7. Does energy consumption affect growth? By Saten Kumar; Don J. Webber; Antonio Paradiso
  8. Economic growth and electricity consumption in Africa: MS-VAR and MS-GRANGER causality analysis By Bildirici, Melike
  9. Growth Policy and Inequality in Developing Asia: Lesson from Korea By Hyun-Hoon LEE; Minsoo LEE; Donghyun PARK
  10. Too Much Finance? By Ugo Panizza; Jean-Louis Arcand; Enrico Berkes
  11. The Angolan Economy – Diversification and Growth By Kyle, Steven C.
  12. The dynamics of catch-up and skill and technology upgrading in China By Michael Funke; Xi Chen
  13. Global financial crisis and foreign development assistance shocks in least developing countries By Das, Debasish Kumar; Dutta, Champa Bati
  14. Does Financial Development Reduce CO2 Emissions in Malaysian Economy? A Time Series Analysis By Shahbaz, Muhammad; Solarin, Sakiru Adebola; Mahmood, Haider
  15. The Effect of Growth Volatility on Income Inequality By Ho-Chuan Huang; WenShwo Fang; Stephen M. Miller
  16. Growth and Non-Regular Employment By Hiroaki Miyamoto
  17. Neoclassical Growth and the Natural Resource Curse Puzzle By Guilló, María Dolores; Pérez-Sebastián, Fidel
  18. Factor Endowment, Structural Coherence, and Economic Growth By Natasha Xingyuan Che
  19. Airports and Urban Growth: Evidence from a Quasi-Natural Policy Experiment By Blonigen, Bruce A.; Cristea, Anca D.
  20. Accelerating And Sustaining Growth: Economic and Political Lessons By Arvind Virmani

  1. By: Chu, Angus C.; Furukawa, Yuichi
    Abstract: This letter explores the different implications of patent breadth and R&D subsidies on economic growth and endogenous market structure in a Schumpeterian model. We find that the two policy instruments have the same positive effect on economic growth when the model exhibits scale effects under a fixed number of firms. When the model becomes scale-invariant under an endogenous number of firms, patent breadth increases economic growth but decreases the number of firms, whereas R&D subsidies increase the number of firms but decrease economic growth.
    Keywords: economic growth; endogenous market structure; patents; R&D subsidies
    JEL: O30 O40
    Date: 2012–08
  2. By: Roman Horváth (Charles University, Prague and IOS, Regensburg)
    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: 2012–07
  3. By: Chu, Angus C.; Ji, Lei
    Abstract: In this note, we develop a monetary Schumpeterian growth model to explore the effects of monetary policy on endogenous market structure, economic growth and social welfare. We find that an increase in the nominal interest rate reduces the equilibrium number of firms. Although long-run economic growth is independent of the nominal interest rate due to a scale-invariant property of the model, a higher nominal interest rate leads to lower growth rates of innovation, output and consumption during the transition path. Taking into account transition dynamics, we find that social welfare is decreasing in the nominal interest rate; therefore, Friedman rule is socially optimal in this economy.
    Keywords: monetary policy; economic growth; R&D; endogenous market structure
    JEL: O30 O40 E41
    Date: 2012–08
  4. 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: Inflation: costs and benefits
    JEL: E31 E52 O31 O42
    Date: 2012
  5. By: Kunieda, Takuma; Shibata, Akihisa
    Abstract: A dynamic general equilibrium model with infinitely lived entrepreneurs and financiers is developed to investigate a possible mechanism that explains business cycles and a financial crisis. The highest growth rate is achievable only if financiers coexist with entrepreneurs, given a certain extent of financial market imperfections. However, if financiers coexist with entrepreneurs, the economy is highly likely to go into a financial crisis for some parameter values. These two-sided implications of the coexistence of entrepreneurs and financiers explain why both instability and high growth are frequently observed in modern economies.
    Keywords: Endogenous business cycles; Financial crisis; Economic boom; Financial market imperfections
    JEL: E32 O16 O40
    Date: 2012–07–12
  6. By: Michael Kuhn (Vienna Institute of Demography); Klaus Prettner (Georg-August-University Göttingen)
    Abstract: We study the effects of a labor-intensive health care sector within an R&D-driven growth model with overlapping generations. Health care increases longevity and labor participation/productivity. We examine under which conditions expanding health care enhances growth and welfare. Even if the provision of health care diverts labor from productive activities, it may still fuel R&D and economic growth if the additional wealth that comes with expanding longevity translates into a more capital/machine- intensive final goods production and, thereby, raises the return to developing new machines. We establish mild conditions under which an expansion of health care beyond the growth-maximizing level is Pareto-improving.
    Keywords: endogenous growth; mortality; (Blanchard) overlapping generations; health care; research and development; sectoral composition
    JEL: I15 I18 O11 O41 O43
    Date: 2012–08–08
  7. By: Saten Kumar (Department of Economics, Auckland University of Technology, Auckland, New Zealand.); Don J. Webber (Department of Accounting, Economics and Finance, University of the West of England, Bristol, UK); Antonio Paradiso (Department of Economics, University of Rome La Sapienza, Rome, Italy)
    Abstract: A review of the literature reveals discrepancies between estimates of the impact of energy consumption on output and growth. This paper highlights the importance of underlying theoretical concerns, extends a neoclassical growth model to include energy consumption, applies panel data cointegration methods that deal with cross-sectional dependence and structural breaks to a sample of thirteen high energy consuming countries, and provides empirical estimates of the impact of energy consumption on output and growth. Results suggest that energy consumption has a permanent positive effect on output levels but has no statistically significant effect on growth. We suggest that rebound effects may confound the observable effects of energy on growth and that the effects on the environment of attempts to stimulate economic growth may never be forecast correctly ex ante.
    Keywords: Energy consumption per capita; Level effect; Growth effect.
    JEL: O40 Q40
    Date: 2012–04
  8. By: Bildirici, Melike
    Abstract: Knowledge of the direction of the causality between electricity consumption and economic growth is of primary importance if appropriate energy policies and energy conservation measures are to be devised.This study estimates the causality relationship between electricity consumption and economic growth by Markov Switching Vector Auto Regression (VAR) and Markov Switching Granger Causality methods for some emerging countries; Brunei, Cameron, Côte d'Ivoire, Nigeria, South Africa, Togo and Zimbabwe. The results from MS-VAR models show that in regime one, two and three, Electricity Consumption (EC) is the Granger cause of the Gross Domestic Product (GDP) and GDP is the Granger cause of the EC. In sum, we find some evidence of bidirectional GC between the EC and the GDP.
    Keywords: Economic Growth; Electricity Consumption; MS-VAR; MS-Granger Causality
    JEL: C0 N7
    Date: 2012–01–29
  9. By: Hyun-Hoon LEE (Department of International Trade and Business, Kangwon National University); Minsoo LEE (Economics and Research Department, Asian Development Bank (ADB)); Donghyun PARK (Economics and Research Department, Asian Development Bank (ADB))
    Abstract: While developing Asia has traditionally prioritized growth over equality, recent years have witnessed a growing popular demand for more inclusive growth in the region. In this connection, Korea, which has managed to combine rapid economic growth and moderate inequality levels, offers potentially valuable lessons for developing Asia. The central objective of our paper is to analyze the relationship between growth policy and inequality in Korea in order to identify relevant policy implications for developing Asia. According to our analysis, the one policy that stands out as a driver of both rapid economic growth and more equal income distribution is large and systematic investments in public education. The broader positive lesson from the Korean experience is that growth and inequality do not necessarily go hand in hand, and government policy can make a difference.
    Keywords: Growth; growth policy; inequality; Asia; Korea
    JEL: D30 O40 O43
    Date: 2012–07–01
  10. By: Ugo Panizza; Jean-Louis Arcand; Enrico Berkes
    Abstract: This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be "too much" finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the "vanishing effect" of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.
    Keywords: Cross country analysis , Development , Economic growth , Financial sector , Financial systems ,
    Date: 2012–06–20
  11. By: Kyle, Steven C.
    Keywords: International Development, Public Economics,
    Date: 2012–01
  12. By: Michael Funke; Xi Chen
    Abstract: This paper accounts for China?s economic growth since 1980 in a uni-fied endogenous growth model in which a sequencing of physical capital accumula-tion, human capital ac-cumulation and innovation drives the rise in China?s aggre-gate 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
  13. By: Das, Debasish Kumar; Dutta, Champa Bati
    Abstract: This paper evaluates whether the exogenous component of the global financial crisis affects OECD-DAC EU donor countries ODA disbursements to the LDCs and how it impacts on LDCs economic prosperity. Using both static and dynamic panel techniques, we find that global financial crisis in OECD-EU donor countries are causes for the significant downside of ODA flows to the LDCs. Consequently it adversely affects through the various transmission channels (e.g. ODA disbursements, remittances, bilateral financial flows, export growth) to the LDCs economic growth. Our results also explore that due to countercyclical role of ODA flows from the donors’ largely affect to the LDCs economic development process negatively. The robustness checks using alternative estimation technique supports our original estimation results in every context.
    Keywords: : Financial crisis; ODA; economic growth; OECD-EU donors; LDCs
    JEL: O11 F35 O5 F39
    Date: 2012–03–22
  14. By: Shahbaz, Muhammad; Solarin, Sakiru Adebola; Mahmood, Haider
    Abstract: This study deals with the question whether financial development reduces CO2 emissions or not in case of Malaysia. For this purpose, we apply the bounds testing approach to cointegration for long run relations between the variables. The study uses annual time series data over the period 1971-2008. Ng-Perron stationarity test is applied to test the unit root properties of the series. Our results validate the presence of cointegration between CO2 emissions, financial development, energy consumption and economic growth. The empirical evidence also indicates that financial development reduces CO2 emissions. Energy consumption and economic growth add in CO2 emissions. The Granger causality analysis reveals the feedback hypothesis between financial development and CO2 emissions, energy consumption and CO2 emissions and, between CO2 emissions and economic growth. The present study provides new sights for policy making authorities to use financial sector as an instrument to decline energy emissions.
    Keywords: Financial development; CO2 emissions; Cointegration
    JEL: Q5 Q4
    Date: 2012–08–01
  15. By: Ho-Chuan Huang (Tamkang University); WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: This paper assesses the long-run effect of growth volatility on income inequality using a comprehensive panel of annual U.S. state-level data during the 1945 to 2004 period. Using the pooled mean group (PMG) estimator, we find overwhelming evidence supporting the hypothesis that larger growth volatility positively and significantly associates with higher income inequality. In addition, our key finding is robust to alternative lag structures, conditioning variables, inequality measures, volatility indicators, and time periods.
    Keywords: Income inequality, growth volatility, mean group estimator, pooled mean group estimator
    JEL: C23 D31 O40
    Date: 2012–06
  16. By: Hiroaki Miyamoto (International University of Japan)
    Abstract: The share of non-regular employment has been increasing in many developed countries during the past two decades. The objective of this paper is to study a cause of the upward trend in non-regular employment by focusing on productivity growth. Data from Japan shows that productivity growth reduces both unemployment and the proportion of nonregular workers to total employed workers. In order to study the impact of long-run productivity growth on unemployment and non-regular employment, I develop a search and matchingmodel with disembodied technological progress and two types of jobs, regular and non-regular jobs. The numerical analysis demonstrates that faster growth reduces the share of non-regular employment, but the effect of faster growth on unemployment is ambiguous.
    Keywords: Growth, Unemployment,Non-regular employment, Search, matching model
    JEL: E24 J64 O40
    Date: 2012–07
  17. By: Guilló, María Dolores (Departamento de Métodos Cuantitativos y Teoría Económica y IUDESP); Pérez-Sebastián, Fidel (Departamento de Fundamentos del Análisis Económico)
    Abstract: The traditional view that natural riches increase the wealth of nations has been recently challenged by empirical findings that point out that natural inputs are negatively related to growth. This paper shows, within a two-sector neo-classical growth model with international trade in goods, that these two views can be reconciled. Natural inputs directly affect both long-run income and transitional growth. These two effects can be positive or negative depending on input elasticities. Furthermore, they go in opposite directions, creating a tension that complicates the interpretation of estimated-coefficient signs in growth regressions. Quantitative results show that the two effects can be significant.
    Keywords: neoclassical growth; resource curse; convergence
    JEL: F11 F43 O11 O13 O41
    Date: 2012–07–26
  18. By: Natasha Xingyuan Che
    Abstract: This paper studies the linkage between structural coherence and economic growth. Structural coherence is defined as the degree that a country's industrial structure optimally reflects its factor endowment fundamentals. The paper found that at least for the overall capital, the shares of capital intensive industries were significantly bigger with higher initial capital endowment and faster capital accumulation. Moreover, there is a positive relationship between a country's aggregate output growth and the degree of structural coherence. Quantitatively, the structural coherence with respect to the overall capital explains about 30% of the growth differential among sample countries.
    Keywords: Economic growth , Industrial structure , Capital accumulation , Production growth , Economic models ,
    Date: 2012–06–28
  19. By: Blonigen, Bruce A.; Cristea, Anca D.
    Abstract: While significant work has been done to examine the determinants of regional development, there is little evidence on the contribution of air services toward this outcome. This paper exploits the unexpected market changes induced by the 1978 Airline Deregulation Act to bring new evidence on the link between airline traffic and local economic growth. Using data for almost 300 Metropolitan Statistical Areas (MSAs) over a two decade time period centered around the policy change, we exploit time variation in long-run growth rates to identify the effects of airline traffic on population, income and employment growth. Our results suggest that air service has a significant positive effect on regional growth, with the magnitude of the effects differing by MSA size and industrial specialization.
    Keywords: airline traffic; urban growth; regional development; Airline Deregulation Act; air transport
    JEL: R1 O18 R4
    Date: 2012–07–26
  20. By: Arvind Virmani
    Abstract: The paper reviews and draws lessons from the experience of fast growing economies including a sub-set of these termed High Growth Economies (HGEs) with a decadal rate of over 7 per cent. It then reviews the history of the Indian growth acceleration following the reforms of the 1990s and its future prospects given the recent slowdown. It analysis the potential dangers and reasons for India’s growth slowdown and proposes policy reforms for sustaining fast growth.
    Keywords: Development , Economic growth , Economic reforms , Emerging markets , India , Political economy ,
    Date: 2012–07–19

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