nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒09‒03
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. The Effect of Public Debt on Growth in Multiple Regimes By Andros Kourtellos; Thanasis Stengos; Chih Ming Tan
  2. Threshold Effects of Sovereign Debt: Evidence from the Caribbean By Craigwell, Roland; Greenidge, Kevin; Thomas, Chrystal; Drakes, Lisa
  3. Financial Sector Ups and Downs and the Real Sector: Up by the Stairs and Down by the Parachute By Aizenman, Joshua; Pinto, Brian; Sushko, Vladyslav
  4. Financial Development and Income Inequality: Is there any Financial Kuznets curve in Iran? By Muhammad, Shahbaz; Tiwari, Aviral; Reza , Sherafatian-Jahromi
  5. Gains and Losses from International Trade in a Knowledge-driven Semi-endogenous Growth Model with Heterogeneous Firms By katsufumi, fukuda
  6. Growth of African Economies: Productivity, Policy Syndromes and the Importance of Institutions By Augustin Kwasi Fosu
  7. Revisiting the Effects of IMF Programs on Poverty and Inequality By Doris A. Oberdabernig
  8. Reserve Accumulation, Growth and Financial Crises By Gianluca Benigno; Luca Fornaro
  9. The Long-run Relationship of Gold and Silver and the Influence of Bubbles and Financial Crises By Dirk G Baur; Duy T. Tran
  10. Influența deficitului bugetar asupra dezvoltării economice a României By Mesea, Oana Elena
  11. Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development By Karlan, Dean S.; Knight, Ryan; Udry, Christopher
  12. A Role Model for the Conduct of Fiscal Policy? Experiences from Sweden By Flodén, Martin

  1. By: Andros Kourtellos (University of Cyprus.); Thanasis Stengos (University of Guelph.); Chih Ming Tan (Clark University)
    Abstract: We employ a structural threshold regression methodology to investigate the heterogeneous effects of debt on growth using public debt as a threshold variable as well as several other plausible variables. Our methodology allows us to address three sources of model uncertainty that characterize cross-country growth data: parameter heterogeneity, theory uncertainty, and endogeneity. We find strong evidence for threshold effects based on democracy, which implies that higher public debt results in lower growth for countries in the Low-Democracy regime. Our results are consistent with the presence of parameter heterogeneity in the cross-country growth process due to fundamental determinants of economic growth proposed by the new growth theories.
    Keywords: parameter heterogeneity, public debt, debt threshold, threshold regression.
    JEL: C59 O40 Z12
    Date: 2012
  2. By: Craigwell, Roland; Greenidge, Kevin; Thomas, Chrystal; Drakes, Lisa
    Abstract: This paper addresses the issue of threshold effects between public debt and economic growth in the Caribbean. The main finding is that there exists a threshold debt to gross domestic product (GDP) ratio of 55–56 percent. Moreover, the debt dynamics begin changing well before this threshold is reached. Specifically, at debt levels lower than 30 percent of GDP, increases in the debt-to-GDP ratio are associated with faster economic growth. However, as debt rises beyond 30 percent, the effects on economic growth diminishes rapidly and at debt levels reaching 55–56 percent of GDP, the growth impacts switch from positive to negative. Thus, beyond this threshold, debt becomes a drag on growth.
    Keywords: Debt Problems; Debt Threshold; Panel Data; Threshold Regressions
    JEL: F34 C23 C24
    Date: 2012
  3. By: Aizenman, Joshua; Pinto, Brian; Sushko, Vladyslav
    Abstract: This paper examines how financial expansion and contraction cycles affect the broader economy throughtheir impact on eight real economic sectors in a panel of 28 countries over 1960-2005, paying particularattention to large, or sharp, contractions and magnifying and mitigating factors. We find that abruptfinancial contractions are more likely to follow periods of accelerated growth, indicative of ‘up by thestairs, down by the parachute’ dynamics. Sharp fluctuations in the financial sector have asymmetriceffects, with the majority of real sectors adversely affected by contractions but not helped by expansions.The adverse effects of financial contractions are transmitted almost exclusively by the financial opennesschannel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impactduring sharp financial contractions. Both effects are magnified during particularly large financialcontractions (with coefficients on interaction terms two to three times greater than when all contractionsare considered). Consequent upon a financial contraction, the most severe real sector contractions occur incountries with high financial openness; relative predominance of construction, manufacturing, andwholesale and retail sectors; and low international reserves.
    Keywords: Economics, financial cycles, financial and trade openness, real transmission of financial shocks, reserves
    Date: 2012–05–10
  4. By: Muhammad, Shahbaz; Tiwari, Aviral; Reza , Sherafatian-Jahromi
    Abstract: This deals with the investigation of the relationship between financial development and income inequality in case of Iran. In doing so, we have applied the ARDL bounds testing approach to examine the long-run relationship in the presence of structural break stemming in the series. The unit root properties have been tested by applying Zivot-Andrews (1992) and Clemente et al. (1998) structural break tests. The VECM Granger causality approach is used to detect the direction of causal relationship between financial development and income distribution. Moreover, Greenwood-Jovanovich (GJ) hypothesis has also been tested for Iranian economy. Our results confirm the long run relationship between the variables. Furthermore, financial development reduces income inequality. Economic growth worsens income inequality, but inflation and globalization improve income distribution. Finally, GJ hypothesis is found as well as U-shaped relationship between globalization and income inequality in case of Iran. This study might provide new insights for policy makers to reduce income inequality by making economic growth more fruitful for poor segment of population and directing financial sector to provide access to financial resources of poor individuals at cheaper cost.
    Keywords: Financial Development; Income Inequality; ARDL Bound Testing
    JEL: E44
    Date: 2012–08–20
  5. By: katsufumi, fukuda
    Abstract: We consider a semi endogenous R&D growth model with international trade, firm heterogeneity, and local knowledge spillover in a closed economy and international knowledge spillover in a symmetric two country economy. We show that by opening trade R&D difficulty (the number of varieties produced) and welfare are ambiguously affected. When the international spillover is large (small), the former is increased (decreased). When the size of the international knowledge spillover is large (small) or the size of the international knowledge spillover is small and the size of intertemporal knowledge spillover is small (large), the latter increases (decreses). Without intertemporal and international knowledge spillovers, welfare increases.
    Keywords: Heterogeneous Firms; Semi Endogenous Growth; Gains and Losses from International Trade
    JEL: F15 O30 F12 O33
    Date: 2012–08–21
  6. By: Augustin Kwasi Fosu
    Abstract: Recent evidence from an exhaustive political-economy study of growth of African economies – the Growth Project of the African Economic Research Consortium (AERC) - suggests that ‘policy syndromes’ have substantially contributed to the generally poor growth in sub-Saharan Africa during post-independence. The current article employs the unique data and insights generated by the Growth Project to further explore the importance of a ‘syndrome-free’ (SF) regime for growth in the region by examining: (i) the channels via which SF affects growth: total factor productivity (TFP) versus factors of production; and (ii) the role of institutions in mediating this impact, with special attention accorded the efficacy of the restraint on the executive branch of government in mitigating the potentially adverse effect of ethnicity.
    Date: 2012
  7. By: Doris A. Oberdabernig (Department of Economics, Vienna University of Economics and Business)
    Abstract: Investigating how lending programs of the International Monetary Fund (IMF) affect poverty and inequality, we explicitly address model uncertainty. We control for endogenous selection into IMF programs using data on 86 low- and middle income countries for the 1982-2009 period and analyze program effects on various poverty and inequality measures. The results rely on averaging over 90 specifications of treatment effect models and indicate adverse short-run effects of IMF agreements on poverty and inequality for the whole sample, while for a 2000-2009 subsample the results are reversed. There is evidence that significant short-run effects might disappear in the long-run.
    Keywords: Poverty and income distribution, IMF lending programs, model uncertainty, treatment effects, cross-country analysis, developing countries
    JEL: O11 O15 O19 C31
    Date: 2012–08
  8. By: Gianluca Benigno; Luca Fornaro
    Abstract: We present a model that reproduces two salient facts characterizing the international monetary system: i) Faster growing countries are associated with lower net capital inflows and ii) Countries that grow faster accumulate more international reserves and receive more net private inflows. We study a two-sector, tradable and non-tradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. We use the model to compare the laissez-faire equilibrium and the optimal reserve policy in an economy that is opening to international capital flows. We find that the optimal reserve management entails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. We also find that the welfare gains of reserve policy are large, in the order of 1 percent of permanent consumption equivalent.
    Keywords: foreign reserve accumulation, gross capital flows, growth, financial crises
    JEL: F31 F32 F41 F43
    Date: 2012–08
  9. By: Dirk G Baur (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Duy T. Tran (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: This paper analyzes the long-run relationship between gold and silver prices. We closely follow Escribano and Granger (1998) and extend their study. First, we use a 40-year sample period from 1970-2010 and examine the existence and stability of a long-run relationship between gold and silver prices. Second, we study the role of bubbles and financial crises for the relationship between gold and silver. The results indicate that extreme price changes in certain periods create long-run (co-integration relationships since gold and silver are not co-integrated in “normal” periods.
    Keywords: co-integration; nonlinear error-correlation; Granger causality; gold; silver; bubbles; financial crisis
    Date: 2012–08–01
  10. By: Mesea, Oana Elena
    Abstract: This paper empirically analyzes the impact of budget deficit on the economic development of Romania. Using the OLS estimates for quarterly series for the period from 2001 to 2011, the results of the estimates prove that there is an indirect relationship between budget deficit and economic growth of Romania. According to the best statistically significant model from the three different model tested, we reached the result that one percent rise of budget deficit gives a 1.36 percent fall in real GDP. This result sustains the neoclassical hypothesis and is against the Keynesist hypothesis or the Ricardian equivalence.
    Keywords: budget deficit; economic growth; fiscal policy; Romania
    JEL: E62 H62 H61
    Date: 2012–08–04
  11. By: Karlan, Dean S.; Knight, Ryan; Udry, Christopher
    Abstract: Many basic economic theories with perfectly functioning markets do not predict the existence of the vast number of microenterprises readily observed across the world. We put forward a model that illuminates why financial and managerial capital constraints may impede experimentation, and thus limit learning about the profitability of alternative firm sizes. The model shows how lack of information about one’s own type, but willingness to experiment to learn one’s type, may lead to short-run negative expected returns to investments on average, with some outliers succeeding. To test the model we put forward first a motivating experiment from Ghana, and second a small meta-analysis of other experiments. In the Ghana experiment, we provide inputs to microenterprises, specifically financial capital (a cash grant) and managerial capital (consulting services), to catalyze adoption of investments and practices aimed towards enterprise growth. We find that entrepreneurs invest the cash, and take the advice, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. The small meta analysis includes results from 18 other experiments in which either capital or managerial capital were relaxed, and find mixed support for this theory.
    Keywords: business training;; consulting; credit constraints; entrepreneurship; managerial capital
    JEL: D21 D24 D83 D92 L20 M13
    Date: 2012–08
  12. By: Flodén, Martin
    Abstract: Sweden was hit by a severe macroeconomic crisis in the early 1990s. GDP fell for three consecutive years in 1991-1993, unemployment increased by 9 percentage points, banks had to be nationalized, and public budget deficits exceeded 10 percent of GDP. The recovery was however quick. GDP growth was around four percent in 1994-1995, and budget deficits had been eliminated by 1998. Growth remained high in the subsequent decade, and the government debt ratio was reduced by almost 50 percent of GDP. This paper describes and analyzes the Swedish crisis and the policy measures implemented in response to the crisis. Policy measures include abandoning the fixed exchange rate, fiscal austerity, a new stricter fiscal framework, and several structural reforms in the 1990s. These policies were appropriate for handling the Swedish crisis, but the Swedish experiences have limited applicability for the current debt crisis, in particular because currency depreciation in combination with strong growth on export markets was a key ingredient in the Swedish recovery. Implementing fiscal austerity would have been more complicated absent this export-led growth. Moreover, the new fiscal framework has most likely contributed to strengthening public finances, but I demonstrate that budget surpluses and high GDP growth only explain around a third of the reduction in the public debt ratio after 1997.
    Keywords: Banking crisis; Fiscal consolidation; Fiscal rules; Macroeconomic crisis
    JEL: E02 E32 E62 E65 G01
    Date: 2012–08

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