nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒10‒06
twenty-two papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial liberalisation, Banking Crises and Economic Growth in African Countries By Enowbi Batuo, Michael; Mlambo, Kupukile
  2. Large Agglomerations and Economic Growth in Urban India: An Application of Panel Data Model By Tripathi, Sabyasachi
  3. Middle-income growth traps By Agenor, Pierre-Richard; Canuto, Otaviano
  4. Cointegration Models Applied For Portugal’s Energy Consumption, Inward FDI and GDP Series (1980-2007) By Cerdeira Bento, João Paulo
  5. New Keynesian Macroeconomics: Empirically tested in the case of Republic of Macedonia By Josheski, Dushko; Lazarov, Darko
  6. Beyond 2015: Maintaining Ireland’s Public Finances on a Sustainable Path By Cronin, David
  7. Is Energy Consumption Per Capita Stationary? Evidence from First and Second Generation Panel Unit Root Tests By Muhammad, Shahbaz; Tiwari, Aviral Kumar; Khan, Saleheen
  8. Information and Communications Technology (ICT) and Trade in Emerging Market Economies By Hiranya K. Nath; Lirong Liu
  9. Who Benefits from Growth ? By Simon Beck; Thierry Kamionka
  10. The role of foreign direct investment in the renewable electricity generation and economic growth nexus in Portugal: a cointegration and causality analysis By Bento Cerdeira, João Paulo
  11. Significant Drivers of Growth in Africa By Oleg Badunenko; Daniel J. Henderson; Romain Houssa
  12. Heterogeneity of Regional Growth in the European Union By Martin Wagner; Achim Zeileis
  13. Agency, Firm Growth and Managerial Turnover By Anderson, Ronald W.; Bustamante, Maria Cecilia; Guibaud, Stéphane
  14. Firm Growth and Efficiency in the Banking Industry: A new test of the efficient structure hypothesis By HOMMA Tetsushi; TSUTSUI Yoshiro; UCHIDA Hirofumi
  15. International Mergers with Financially Constrained Owners By Berg, Aron; Norbäck, Pehr-Johan; Persson, Lars
  16. Factor Accumulation and the Determinants of TFP in the GCC By Raphael Espinoza
  17. The Optimal Carbon Tax and Economic Growth: Additive versus multiplicative damages By Armon Rezai; Frederick van der Ploeg; Cees Withagen
  18. Benchmarking financial systems around the world By Cihak, Martin; Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
  19. Non-Core Bank Liabilities and Financial Vulnerability By Joon-Ho Hahm; Hyun Song Shin; Kwanho Shin
  20. Banking, Debt, and Currency Crises: Early Warning Indicators for Developed Countries By Jan Babecký; Tomáš Havránek; Jakub Mateju; Marek Rusnák; Katerina Šmídková; Borek Vašícek
  21. Long-Run Implications of the Covered Interest Rate Parity Condition: Evidence during the Recent Crisis and Non-Crisis Periods By Nagayasu, Jun
  22. Distortions to agriculture and economic growth in Sub-Saharan Africa By Anderson, Kym; Bruckner, Markus

  1. 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
  2. By: Tripathi, Sabyasachi
    Abstract: This paper investigates the impact of urban agglomeration on urban economic growth, using static and dynamic panel data approach, based on data of 52 large cities in India for the period 2000 to 2009. The results shows that agglomeration has a strong positive effect on urban economic growth and support the “Williamson hypothesis” that agglomeration increases economic growth only up to certain level of economic development. The critical level per-capita city income is estimated about Rs. 37049 per-capita at 1999-2000 constant prices. In addition, the results indicate that human capital accumulation promotes urban economic growth.
    Keywords: Agglomeration; Economic Growth; Panel Data Approach; Urban India
    JEL: P25
    Date: 2012–08
  3. By: Agenor, Pierre-Richard; Canuto, Otaviano
    Abstract: This paper studies the existence of middle-income growth traps in a two-period overlapping generations model of economic growth with two types of labor and endogenous occupational choices. It also distinguishes between"basic"and"advanced"infrastructure, with the latter promoting design activities, and accounts for a knowledge network externality associated with product diversification. Multiple steady-state equilibria may emerge, one of them taking the form of a low-growth trap characterized by low productivity growth and a misallocation of talent -- defined as a relatively low share of high-ability workers in design activities. Improved access to advanced infrastructure may help escape from that trap. The implications of other public policies, including the protection of property rights and labor market reforms, are also discussed.
    Keywords: Economic Theory&Research,Political Economy,Labor Policies,Economic Growth,Debt Markets
    Date: 2012–09–01
  4. By: Cerdeira Bento, João Paulo
    Abstract: This study runs a cointegration analysis on annual data from 1980 to 2007 to investigate the relationship between primary energy consumption, economic growth and net inflows of foreign direct investment with the Engle and Granger method, Stock-Watson dynamic ordinary least squares (DOLS), the bounds testing approach to cointegration and error correction modelling. The empirical results suggest that there is a stable long run linear cointegration relationship between these three variables. While income has a large and positive influence on energy consumption, the results point to a small but negative effect of foreign direct investment (FDI) on energy consumption. As for the short-run relationship among the series, the estimation and inference in the autoregressive distributed lag error correction model (ARDL) further confirm this link. These findings have important policy implications, since the promotion of appropriate structural policies aiming at attracting foreign investment can induce energy conservation without obstructing economic growth.
    Keywords: Energy consumption; Economic growth; Foreign direct investment; Cointegration
    JEL: Q43
    Date: 2012–09–28
  5. 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
    JEL: B22 B23
    Date: 2012–09–25
  6. By: Cronin, David (Central Bank of Ireland)
    Abstract: In this note, three mechanical fiscal rules that are designed to maintain a sustainable path for the public finances are examined. Adherence to a strict numerical target for the deficit ratio has a procyclical effect on the economy’s growth rate. Building a safety margin into deficit targets in the manner of the Stability and Growth Pact allows the public finances to have a stabilising influence on the growth cycle and ensures a lower average government debt ratio is achieved over time. A debt target rule would result in a different path for the structural primary budget balance and the debt ratio over time even when the long run targets for those variables were the same as under the Pact.
    Date: 2011–07
  7. By: Muhammad, Shahbaz; Tiwari, Aviral Kumar; Khan, Saleheen
    Abstract: This paper investigates the unit root properties of energy consumption per capita of 103 high, middle and low income countries using first and second generation panel unit root tests. Our results indicate that energy consumption per capita contains stationary process in all groups of countries. This suggests that short run energy policies should be followed to sustain economic growth and to fulfill energy demand.
    Keywords: Energy Consumption; Panel Unit Root Test
    JEL: Q4
    Date: 2012–09–24
  8. By: Hiranya K. Nath (Department of Economics and International Business, Sam Houston State University); Lirong Liu (Department of Economics and International Business, Sam Houston State University)
    Abstract: This paper examines the effects of information and communications technology (ICT) on international trade in emerging markets. Using panel data for 40 emerging market economies (EMEs) for a period from 1995 to 2010, we estimate fixed effects models of exports and imports on ICT and other control variables. Our ICT variables include the growth of telecom investment, international Internet bandwidth, Internet subscriptions per 100 people, and the number of Internet hosts per 100 people. We use the share of total exports and of total imports in GDP as the dependent variables. Additionally, we consider the GDP share of exports and imports for goods and services separately. The main control variables are: per capita GDP growth, population growth, and the GDP growth for the rest of the world. The empirical results overwhelmingly suggest that Internet bandwidth, Internet subscriptions, and Internet hosts have significant positive impacts on export share while all four ICT variables including telecom investment growth have significant positive impacts on import shares in emerging market economies. This result is robust across shorter sample period, a subsample of EMEs, alternative estimation method, and alternative model specifications. There are important policy implications of this result for developing countries.
    Date: 2012–08
  9. By: Simon Beck (Crest); Thierry Kamionka (Crest)
    Abstract: In this paper we highlight the link existing between economic growth and inequality. Using the FH-DADS panel data set, resulting from the matching of Pôle Emploi (French National Employment Agency) historical database and the "Déclarations Annuelles de Données Sociales” data set (DADS), we show that inequality increases with mobility, and that mobility evolves with GDP variations. Data show indeed that inequality tends to increase during economic growth periods and to decrease during slow down, through unequal mobility between individuals. In order to explain this phenomenon, we use two structural models. One based on Jolivet, Postel-Vinay and Robin (2006) allows us to link inequality and mobility through equilibrium changes on the job market. Another one, due to Robin (2011), confirms on US data the link existing between inequality and economic growth
    Keywords: Inequality, Growth, Labor market, Mobility, Panel data, Equilibrium search model
    JEL: C23 J60 D31
    Date: 2012–09
  10. By: Bento Cerdeira, João Paulo
    Abstract: This study attempts to investigate a supply function for electricity in Portugal through cointegration and causality analysis over the sample period of 1970 to 2008 to test hypotheses related to the electricity-economic growth nexus in the literature. Evidence is found in favour of cointegration among electricity generation from renewable sources, real gross domestic product, inward foreign direct investment, carbon emissions from electricity production and population size in Portugal by using the bound testing approach to cointegration and error correction models developed within an autoregressive distributed lag (ARDL) framework. Evidence from Granger causality tests show that unidirectional causality is running from renewable electricity production to foreign direct investment in the short-run, and indicate the presence of bilateral causality among renewable electricity production, inward foreign direct investment, real income and population. The joint short- and long-run Granger causality tests provide further support for the feedback hypothesis. These findings have important policy implications, since the promotion of appropriate structural policies aiming at attracting foreign direct investment can induce conservation and efficient electricity use without obstructing economic growth. The promotion of foreign direct investment is crucial in boosting Portugal’s socio-economic development towards a more efficiency-orientated and less resource-depleting economy.
    Keywords: Renewable electricity production; Economic growth; Foreign direct investment; ARDL cointegration; Granger causality; Portugal
    JEL: C32 Q43
    Date: 2012–09–24
  11. By: Oleg Badunenko (University of Cologne); Daniel J. Henderson (University of Alabama); Romain Houssa (University of Namur)
    Abstract: We employ bootstrap techniques in a production frontier framework to provide statistical inference for each component in the decomposition of labor productivity growth, which has essentially been ignored in this literature. We show that only two of the four components have significantly contributed to growth in Africa. Although physical capital accumulation is the largest force, it is not statistically significant. Thus, ignoring statistical inference would falsely identify physical capital accumulation as a major driver of growth in Africa when it is not.
    Keywords: Africa, bootstrap, growth, production frontier
    JEL: C14 O10 O40
    Date: 2012–08
  12. By: Martin Wagner; Achim Zeileis
    Abstract: This paper uses model-based recursive partitioning to study economic growth in the 255 European Union NUTS2 regions over the period 1995-2005. The starting point of the analysis is a human-capital augmented Solow-type growth equation similar in spirit to Mankiw, Romer, and Weil (1992). Initial GDP and the share of highly educated in the working age population are found to be important for explaining economic growth, whereas the investment share in physical capital is only significant for coastal regions in the PIIGS countries. Recursive partitioning leads to a regression tree with four terminal nodes with partitioning according to (i) capital regions, (ii) non-capital regions in or outside the so-called PIIGS countries and (iii) inside the respective PIIGS regions furthermore between coastal and non-coastal regions.
    Keywords: convergence, growth regressions, recursive partitioning, regional data
    JEL: C31 C51 O18 O47
    Date: 2012–10
  13. By: Anderson, Ronald W.; Bustamante, Maria Cecilia; Guibaud, Stéphane
    Abstract: We study managerial incentive provision under moral hazard in a firm subject to stochastic growth opportunities. In our model, managers are dismissed after poor performance, but also when an alternative manager is more capable of growing the firm. The optimal contract may involve managerial entrenchment, such that growth opportunities are foregone after good performance. Firms with better growth prospects have higher managerial turnover and more front-loaded compensation. Firms may pay severance to incentivize their managers to report truthfully the arrival of growth opportunities. By ignoring the externality of the dismissal policy onto future managers, the optimal contract implies excessive retention.
    Keywords: agency; compensation policy; firm growth; managerial turnover; optimal contracting; severance pay
    JEL: G30 G35
    Date: 2012–09
  14. By: HOMMA Tetsushi; TSUTSUI Yoshiro; UCHIDA Hirofumi
    Abstract: This paper proposes a new test of the efficient structure hypothesis by directly examining the relation between firm efficiency and firm growth. This is also a test of the so-called quiet-life hypothesis. Applying this test to large banks in Japan, we find that more efficient banks become larger, which is consistent with the efficient structure hypothesis. We also find that market concentration reduces banks' cost efficiency, which is consistent with the quiet-life hypothesis. These findings imply that there is an intriguing growth-efficiency dynamic throughout the life cycle of banks, although yet another finding suggests that the economic impact of the quiet-life hypothesis is less significant than that of the efficient structure hypothesis.
    Date: 2012–09
  15. By: Berg, Aron (Research Institute of Industrial Economics (IFN)); Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: This paper proposes a cross-border M&A model with financially constrained owners in which the identity of the buyer and seller can be determined. We show that policies blocking foreign acquisitions to protect the domestic industry can be counterproductive. Foreign acquisition can increase the domestic owner’s investment in growth industries by reducing their financial restrictions. This calls for a ”financial” efficiency defense in the merger law. We also show that cross-border M&As are not only driven by effects on the merged entity, but also driven by the seller’s alternative investment opportunities.
    Keywords: Investment Liberalization; Mergers & Acquisitions; Corporate Governance; Ownership
    JEL: F23 K21 L13 O12
    Date: 2012–09–24
  16. By: Raphael Espinoza
    Abstract: GDP growth in the GCC has been considerably higher than in advanced economies or other oil exporters since 1986. The paper shows that the GCC countries have swiftly accumulated large stocks of physical capital but the population increase and the shift away from oil meant that capital intensity actually decreased or remained roughtly constant. On teh other hand, the efforts that have been made to improve human capital would have had positive effects on growth though educational attainment remains below what is achieved by countries with similar levels of income. A growth accounting exercise suggests as a result that the development of Bahrain and Saudi Arabia was hampered by declining TFP, while TFP growth in Qatar and the UAE would have been low. One potential explanation is that the kind of capital that has been accumulated in the region (aircraft, computer equipment, electrical equipment) is not fully productive because the labor force is not educated enough. The paper also discusses the lessons from the impirical growth literature for the GCC. The poor quality of institutions and the large size of government consumption, both of which ar possile symptoms of a resource curse, could explain the disappointing TFP growth.
    Keywords: Gult Cooperation Council, Growth Accounting, Middle East and North Africa, Resource Curse
    JEL: O43 O53
    Date: 2012
  17. By: Armon Rezai; Frederick van der Ploeg; Cees Withagen
    Abstract: In a calibrated integrated assessment model we investigate the differentia impact of additive and multiplicative damages from climate change for both a socially optimal and a business-as-usual scenario in the market economy within the context of a Ramsey model of economic growth. The sources ofenergy are fossil fuel which is available at a cost which rises as reserves diminish and a carbon-free backstop supplied at a decreasing cost. if damages are not proportional to aggregate production output, and the economy is along a development path, the social cost of carbon and the optimal carbon tax are smaller as damages can more easily be compensated for by higher output. As a result, the economy switches later from fossil fuel to the carbon-free backstop and leaves less fossil fuel in situ. This is in contrast to a partial equilibrium analysis with dmages in utility rather than in production which finds that the willingness to forsake current consumption to avoid future global warming is higher (lower) under additive damages in a growing economy if the elasticity of intertemporal substitution is smaller (bigger) than one.
    Keywords: climate change, multiplicative damages, additive damages, integrated assessment models, Ramsey growth model, fossil fuel, carbon-free backstop
    JEL: H21 Q51 Q54
    Date: 2012
  18. By: Cihak, Martin; Demirguc-Kunt, Asli; Feyen, Erik; Levine, Ross
    Abstract: This paper introduces the Global Financial Development Database, an extensive dataset of financial system characteristics for 205 economies from 1960 to 2010. The database includes measures of (a) size of financial institutions and markets (financial depth), (b) degree to which individuals can and do use financial services (access), (c) efficiency of financial intermediaries and markets in intermediating resources and facilitating financial transactions (efficiency), and (d) stability of financial institutions and markets (stability). The authors document cross-country differences and time series trends.
    Keywords: Debt Markets,Emerging Markets,Access to Finance,Banks&Banking Reform,Economic Theory&Research
    Date: 2012–08–01
  19. By: Joon-Ho Hahm; Hyun Song Shin; Kwanho Shin
    Abstract: A lending boom is reflected in the composition of bank liabilities when traditional retail deposits (core liabilities) cannot keep pace with asset growth and banks turn to other funding sources (non-core liabilities) to finance their lending. We formulate a model of credit supply as the flip side of a credit risk model where a large stock of non-core liabilities serves as an indicator of the erosion of risk premiums and hence of vulnerability to a crisis. We find supporting empirical evidence in a panel probit study of emerging and developing economies.
    JEL: F32 F33 F34
    Date: 2012–09
  20. By: Jan Babecký (Czech National Bank); Tomáš Havránek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jakub Mateju (CERGE-EI); Marek Rusnák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Katerina Šmídková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Borek Vašícek (Czech National Bank)
    Abstract: We construct and explore a new quarterly dataset covering crisis episodes in 40 developed countries over 1970–2010. First, we examine stylized facts of banking, debt, and currency crises. Using panel vector autoregression, we confirm that currency and debt crises are typically preceded by banking crises, but not vice versa. Banking crises are also the most costly in terms of the overall output loss, and output takes about six years to recover. Second, we try to identify early warning indicators of crises specific to developed economies, accounting for model uncertainty by means of Bayesian model averaging. Our results suggest that onsets of banking and currency crises tend to be preceded by booms in economic activity. In particular, we find that growth of domestic private credit, increasing FDI inflows, rising money market rates as well as increasing world GDP and inflation were common leading indicators of banking crises. Currency crisis onsets were typically preceded by rising money market rates, but also by worsening government balances and falling central bank reserves. Early warning indicators of debt crises are difficult to uncover due to the low occurrence of such episodes in our dataset. Finally, employing a signaling approach we show that using a composite early warning index significantly increases the usefulness of the model when compared to using the best single indicator (domestic private credit).
    Keywords: Early warning indicators, Bayesian model averaging, macro-prudential policies
    JEL: C33 E44 E58 F47 G01
    Date: 2012–07
  21. By: Nagayasu, Jun
    Abstract: This paper analyzes the stationarity of forward premiums in foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we con…rmed mixed evidence of stationary forward premiums. Further analysis suggests that the nonstationary element has been attributable to regime shifts which are closely associated with the effects of the Lehman Shock and changing monetary policies. These effects can be captured by interest rates, leaving the covered interest parity condition as a valid economic concept at least in the long-run.
    Keywords: Panel unit root tests; structural shifts; forward premiums; Lehman shock
    JEL: C23 F31
    Date: 2012–09–01
  22. By: Anderson, Kym; Bruckner, Markus
    Abstract: To what extent has Sub-Saharan Africa's slow economic growth over the past five decades been due to price and trade policies that discouraged production of agricultural relative to non-agricultural tradables? This paper uses a new set of estimates of policy induced distortions to relative agricultural prices to address this question econometrically. First, the authors test if these policy distortions respond to economic growth, using rainfall and international commodity price shocks as instrumental variables. They find that on impact there is no significant response of relative agricultural price distortions to changes in real GDP per capita growth. Then, the authors test the reverse proposition and find a statistically significant and sizable negative effect of relative agricultural price distortions on the growth rate of Sub-Saharan African countries. The fixed effects estimates yield that, during the 1960-2005 period, a ten percentage points increase in distortions to relative agricultural prices decreased the region's real GDP per capita growth rate by about half a percentage point per annum.
    Keywords: Economic Theory&Research,Achieving Shared Growth,Inequality,Markets and Market Access,Emerging Markets
    Date: 2012–09–01

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