nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒09‒30
seventeen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Germs, Social Networks and Growth By Alessandra Fogli; Laura Veldkamp
  2. Financial liberalisation, Banking Crises and Economic Growth in African Countries By Enowbi Batuo, Michael; Mlambo, Kupukile
  3. Banking Market Structure, Liquidity Needs, and Industrial Growth Volatility By Ho-Chuan Huang; WenShwo Fang; Stephen M. Miller
  4. Does the internet generate economic growth, international trade, or both? By Meijers, Huub
  5. An Eaton-Kortum Model of Trade and Growth By NAITO Takumi
  6. Iterated Function Systems with Economic Applications By Shilei Wang
  7. Inclusive Growth Strategies for Pakistan: Myth or Reality for Policymakers! By Syed Muhammad, Atif; Sardar, Mohazzam
  8. Does US GDP stall? By Wai-Yip Alex Ho; James Yetman
  9. Inequality, extractive institutions, and growth in nondemocratic regimes By Mizuno, Nobuhiro; Naito, Katsuyuki; Okazawa, Ryosuke
  10. The Role Of Intangible Capital in the Transformation and Growth of the Chinese Economy By Charles R. Hulten; Janet X. Hao
  11. A reduction in European over-consumption will be undone by any Eurozone solution. By Price, Edward
  12. If we are to prevent another lost decade, we need macroeconomic policies to restore economic activity, and public investment to power sustained and productive growth. By Frieden, Jeffry
  13. Can Cities or Towns Drive African Development? Economy-wide Analysis for Ethiopia and Uganda By Dorosh, Paul; Thurlow, James
  14. Sharing high growth across generations:pensions and demographic transition in China By Zheng Song; Kjetil Storesletten; Yikai Wang; Fabrizio Zilibotti
  15. Hoping to Win, Expected to Lose: Theory and Lessons on Micro Enterprise Development By Dean Karlan; Ryan Knight; Christopher Udry
  16. New Keynesian macroeconomics : Empirically tested in the case of Republic of Macedonia By Josheski, Dushko; Lazarov , Darko
  17. Endogenous Leverage in a Binomial Economy: The Irrelevance of Actual Default By Ana Fostel; John Geanakoplos

  1. By: Alessandra Fogli; Laura Veldkamp
    Date: 2012
  2. By: Enowbi Batuo, Michael; Mlambo, Kupukile
    Abstract: While financial liberalisation is considered to be good for economic growth in that it promotes the development of the financial sector, banking crises on the other hand tend to be inimical for economic growth. Moreover, banking crises tend to be preceded by financial liberalisation, as noted in a number of studies. This is because financial liberalisation tends to induce greater risk-taking behaviour by agents, thus leading to banking crises. In this paper we study the effect of financial liberalisation and banking crises on the economic performance of African countries during the period covering 1985 to 2010. Using a treatment effect, two step methods and a panel probit method, our results show that banking crises have a negative impact on economic growth meanwhile financial liberalisation tends to reduce the likelihood of banking crises in African countries.
    Keywords: O16; O47;G23; O55
    JEL: O16 N17 O4
    Date: 2012–06
  3. By: Ho-Chuan Huang (Tamkang University); WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: While the existing literature acknowledges the effect of banking structure on industrial growth as well as the effect of financial development on industrial growth and its volatility, we examine whether banking structure, given bank (financial) development, exerts any nontrivial effect on industrial growth volatility. We show that bank concentration magnifies industrial growth volatility, but reduces the volatility in sectors with higher external liquidity needs. The reduction in industrial growth volatility mostly reflects the smoothing in the variance of real value added per firm growth. Finally a variety of sensitivity checks show that our findings remain for different model specifications, banking market structure measures, liquidity needs indicators, and omitted variables. JEL Classification: G2, O16, E32 Key words: Bank Concentration, External Liquidity, Bank Development, Industrial Growth Volatility
    Date: 2012–09
  4. By: Meijers, Huub (UNU‐MERIT/MGSoG, and Department of Economics, Maastricht University)
    Abstract: Recent cross country panel data studies find a positive impact of internet use on economic growth and a positive impact of internet use on trade. The present study challenges the first finding by showing that internet use does not explain economic growth directly in a fully specified growth model. In particular openness to international trade variables seems to be highly correlated with internet use and the findings in the literature that internet use causes trade is confirmed here, suggesting that internet use impacts trade and that trade impacts economic growth. A simultaneous equations model confirms the positive and significant role of internet use to openness and the importance of openness to economic growth. Internet use has been shown to impact trade more in non-high income countries than in high income countries, whereas the impact of trade on economic growth is the same for both income groups.
    Keywords: economic growth, internet, ICT, trade, panel data
    JEL: C23 L86 L96 F10 O40
    Date: 2012
  5. By: NAITO Takumi
    Abstract: We combine a multi-country, continuum-good Ricardian model of Eaton and Kortum (2002) with a multi-country AK model of Acemoglu and Ventura (2002) to examine how trade liberalization affects countries' growth rates and extensive margins of trade over time. Focusing mainly on the three-country case, we obtain two main results. First, a permanent fall in any trade cost raises the balanced growth rate. Second, trade liberalization increases the liberalizing countries' long-run fractions of exported varieties to all destinations. Our analysis includes a bilateral preferential trade agreement with the long-run bilateral terms of trade unchanged.
    Date: 2012–09
  6. By: Shilei Wang
    Abstract: This work's purpose is to understand the dynamics of some social systems whose properties can be captured by certain iterated function systems. To achieve this intension, we start from the theory of iterated function systems, and then we study two specific economic models on random utility function and optimal stochastic growth.
    Date: 2012–09
  7. By: Syed Muhammad, Atif; Sardar, Mohazzam
    Abstract: The mantra of inclusive growth is taking over the public policy debates addressing poverty alleviation and sustained development in the developing world. In order to reduce poverty substantially, rapid pace of growth is not only necessary, but it should be sustainable in the long run and broad-based across sectors, nonetheless, inclusive of country’s labour force at large. Poverty and growth were much discussed and analysed in separation by policymakers in the previous decades. Inclusive growth strategy is an integration of these two strands of analyses implying relationship between the macro and micro determinants of growth. This paper examines the nature of relationship between the macroeconomic and social-development indicators by using a Multiple Regression Framework and Vector Auto Regression Model, as proposed by Toda-Yamamoto, is used to determine the direction of causality between the key macroeconomic variables of Pakistan over the period of 1997-98s to 2009-10. The paper critically examines Inclusive growth paradigm ─ for market led growth, and suggests its weaknesses which can be addressed through review of the pro-poor goals of economic policy of Post Washington Consensus (PWC). Finally, the paper urges to explore the myths and realities of inclusive growth strategies for policymakers in Pakistan to identify and prioritize the Pakistan specific constraints i.e. Low spending on health and education, promote growth in agriculture and rural development for sustained and inclusive growth.
    Keywords: Inclusive growth; development economics; Pakistan
    JEL: E62 C32 I28
    Date: 2012–07–07
  8. By: Wai-Yip Alex Ho; James Yetman
    Abstract: Low positive GDP growth has been interpreted as evidence that the economy may be "stalling", implying that low growth is a strong predictor of future recessions. We examine the empirical evidence for stalling based on kernel density estimates, probit estimates and Markov switching models. Whether we find evidence for stalling or not depends crucially on how a stall is defined. If we define a stall as a low but positive growth rate, then there is no evidence of stalling in US GDP. Low growth is as likely to be followed by higher growth as by a recession. In contrast, if we define a stall as a decline in the growth rate of the economy to below some threshold, we find evidence for stalling.We also discuss the merits of each of the definitions of stalling, and limitations in using aeronautical analogies for discussing the business cycle.
    Keywords: Business cycles, stall speed, Markov switching
    Date: 2012–09
  9. By: Mizuno, Nobuhiro; Naito, Katsuyuki; Okazawa, Ryosuke
    Abstract: This paper investigates the effect of inequality on economic growth in nondemocratic regimes. We provide a model where a self-interested ruler chooses an institution that constrains the policy choice of the ruler. The ruler must care about the support share of citizens to keep power. Under an extractive institution, the ruler can extract a large share of citizens' wealth, but faces a high probability of losing power due to low public support. We show that inequality affects the ruler's trade-off between his or her expropriation of citizens' wealth and hold on power. Larger inequality among citizens makes the support share for the ruler less responsive to the choice of the institution by the ruler. This situation allows the ruler to choose an extractive institution without a significant increase in the risk of losing power. Hence, large inequality leads to extractive institutions and impedes investment and growth. These results provide an explanation for the negative relationship between inequality and growth observed in nondemocratic countries and the negative relationship between inequality and quality of institutions.
    Keywords: Dictatorship; Economic Growth; Inequality; Institutions
    JEL: O11 D31 P16
    Date: 2012–08–06
  10. By: Charles R. Hulten; Janet X. Hao
    Abstract: Investment in a broad array of intangible capital – R&D, organizational capital, worker training, and brand equity – has occurred in many of the most advanced world economies and has been found to be an important source of economic growth. This evidence suggests that intangible capital formation may play an important role in China’s reform-driven transformation to a more market-oriented open economy. Though the literature on intangible capital is expanding, there has as yet been no general assessment of its role in China’s rapid economic growth. This paper seeks to fill this gap by estimating how much intangible investment has taken place there over the last two decades. The importance of this capital as a driver of China’s recent growth is then assessed using a growth accounting framework, and the results compared to similar findings for the U.S., Japan, the U.K., Germany, France, Italy, and Spain, as well as Japan during its high growth period. The paper also looks beyond the growth accounting framework to the role of saving rates and long-run convergence in shaping longer-term growth prospects. It also focuses on the problem of accurate economic measurement in an economy undergoing rapid transformation.
    JEL: O11 O30 O47 O53
    Date: 2012–09
  11. By: Price, Edward
    Abstract: There is growing global support for growth policies in the Eurozone, Edward Price argues. That growth agenda will however be balanced against the problem of European overconsumption, which has created an imbalance in the world economy. The Eurozone crisis may have a short-term positive effect in this regard, but any growth-led solution to the crisis will likely undo any good work.
    Date: 2012–07–23
  12. By: Frieden, Jeffry
    Abstract: Jeffry Frieden examines the continuing economic malaise in the developed world and argues that the immediate need in both Europe and the United States is for macroeconomic policies to help rekindle economic growth, and systematic plans to restructure household and sovereign debts. Without both, which entails a balancing act and opposition from powerful interests, we are headed for another lost decade.
    Date: 2012–07–03
  13. By: Dorosh, Paul; Thurlow, James
    Abstract: Rapid urbanization is an important characteristic of African development and yet the structural transformation debate focuses on agriculture.s relative merits without also considering the benefits from urban agglomeration. As a result, African governments
    Keywords: urbanization, rural development, growth, poverty, CGE model, Africa
    Date: 2012
  14. By: Zheng Song (Department of Economics, University of Chicago Booth, Chicago, Illinois, United States); Kjetil Storesletten (Federal Reserve Bank of Minneapolis, Minnesota, United States); Yikai Wang (Department of Economics, University of Zurich, Switzerland); Fabrizio Zilibotti (CEPRA, Institute of Economics, Universita' della Svizzera Italiana)
    Abstract: Intergenerational inequality and old-age poverty are salient isuues in contemporary China. China's aging population threatens the fiscal sustainability of its pension system, a key vehicle for intergenerational redistribution. We analyze the positive and normative effects of alternative pension reforms, using a dynamic general equilibrium model that incorporates population dynamics and productivity growth. Although a reform is necessary, delaying its implementation implies large welfare gains for the (poorer) current generations, imposing only small costs on (richer) future generations. In contrast, a fully funded reform harms current generations, with small gains to future generations. High wage growth is key for these results.
    Keywords: China, credit market imperfections, demographic transition, economic growth, fully funded system, inequality, intergenerational redistribution, labor supply, migration, pensions, poverty, rural-urban reallocation, total fertility rate, wage growth
    JEL: E21 E24 G23 H55 J11 J13 O43 R23
    Date: 2012–07
  15. By: Dean Karlan (Economics Department, Yale University); Ryan Knight (School of Management, Yale University); Christopher Udry (Economics Department, Yale University)
    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: entrepreneurship; credit constraints; business training; consulting; managerial capital
    JEL: D21 D24 D83 D92 L20 M13 O12
    Date: 2012–08
  16. By: Josheski, Dushko; Lazarov , Darko
    Abstract: In this paper we test New Keynesian propositions about inflation and unemployment trade off with the New Keynesian Phillips curve and the proposition of non-neutrality of money. The main conclusion is that there is limited evidence in line with the New-Keynesian theory. Money and growth are cointegrated series and that money growth influences the economics growth with one quarter lag. Cointegration means also that if the two series are cointegrated they have long run equilibrium. St.Louis model in the paper showed overall that increase in money growth leads to decrease in the economy growth. But the effect in the equation at three quarters lag is positive. The NAIRU rate in the unemployment inflation trade off model is almost similar as high to the actual unemployment. In the New Keynesian Phillips curve not surprisingly, there appears to be no statistically significant relationship between inflation and Unemployment –even in the classical Philips curve and in adaptive expectations Philips curve by Modigliani- Papademos (1975). Or the Friedman-Phelps- Lucas expectations-augmented one between the difference of actual and expected inflation rate and the gap between actual and the natural rate of unemployment presented in the next equation.
    Keywords: New-Keynesian Macroeconomics; NAIRU; Money and output trade off
    JEL: B23 B22
    Date: 2012–09–19
  17. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We show that binomial economies with financial assets are an informative and tractable model to study endogenous leverage and collateral equilibrium: endogenous leverage can be highly volatile, but it is always easy to compute. The possibility of default can have a dramatic effect on equilibrium, if collateral is scarce, yet we prove the No-Default Theorem asserting that, without loss of generality, there is no default in equilibrium. Thus potential default has a dramatic effect on equilibrium, but actual default does not. This result is valid with arbitrary preferences, contingent promises, many assets and consumption goods, production, and multiple periods. On the other hand, we show that the theorem fails in trinomial models. For example, in a CAPM model, we find that default is robust. In a model with heterogeneous beliefs, we find that different agents might borrow on the same asset with different LTVs.
    Keywords: Endogenous leverage, Collateral equilibrium, Default, Financial asset, Binomial economy, VaR
    JEL: D52 D53 E44 G01 G11 G12
    Date: 2012–09

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