nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒10‒13
23 papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Demographic change and R&D-based economic growth: reconciling theory and evidence By Klaus Prettner; Timo Trimborn
  2. Germs, Social Networks and Growth By Karthik Reddy; Moritz Schularick; Vasiliki Skreta
  3. Is Renewable Energy Consumption Effective to Promote Economic Growth in Pakistan: Evidence from Bounds Testing and Rolling Window Approach By Muhammad, Shahbaz; Qazi , Muhammad Adnan Hye; Muhammad, Zeshan
  4. Financial Capital Overaccumulation By Hsu, Sara
  5. The Past and Future of Knowledge-based Growth By Holger Strulik; Klaus Prettner; Alexia Prskawetz
  6. Agglomeration, Inequality and Economic Growth: Cross-section and panel data analysis By David Castells; Vicente Royuela
  7. In Search of Growth Effects by inward FDI in Central East Europe By Johannes Stephan; Olivier Zieschank
  8. Agglomeration and Growth: Evidence from the Regions of Central and Eastern Europe By Johanna Vogel
  9. Employment growth and gender-specific entrepreneurial externalities in cities By Elsie Echeverri-Carroll; Sofia G. Ayala
  10. Financial Conditions and the Money-Output Relationship in Canada By Maral Kichian
  11. Inflation, Inflation Uncertainty and Output Growth: Recent Evidence from ASEAN-5 Countries By Siti Hamizah Mohd; Ahmad Zubaidi Baharumshah; Stilianos Fountas
  12. Sharing High Growth Across Generations: Pensions and Demographic Transition in China By Song, Zheng Michael; Storesletten, Kjetil; Wang, Yikai; Zilibotti, Fabrizio
  13. Life Expectancy, Labor Supply, and Long-Run Growth: Reconciling Theory and Evidence By Holger Strulik; Katharina Werner
  14. Venezuela's Economic Recovery: Is It Sustainable? By Jake Johnston; Mark Weisbrot
  15. Growth in post-industrial cities: an endogenous model By Riccardo Cappellin
  16. The effects of nation-wide policies on regional growth. By Sabine D'Costa; Enrique Garcilazo; Joaquim Oliveira Martins
  17. Analysis of the sources of economic growth and TFP level in V4 countries and in Finland By Martin Lábaj; Róbert Kúšik
  18. Dynamic Modelling of Long-Term Care Decisions By Michelle Sovinsky; Steven Stern
  19. Trade Openness and Economic Growth: A Panel Causality Analysis By Natasa Bilkic; Ben Carreras Painter; Thomas Gries
  20. Technological Progress and Growth in Selected Pacific Countries By Benedetto Molinari; Jesús Rodríguez López; Jose Luis Torres
  21. How Policy Actions Affect Short-term Post-crisis Recovery? By branimir Jovanovic
  22. Increasing Returns, Decreasing Returns and Regional Economic Convergence in the EU By Gianni Guastella; Francesco Timpano
  23. Balance-of-Payments Constrained Growth: the Case of Turkey By Halicioglu, Ferda

  1. By: Klaus Prettner; Timo Trimborn
    Abstract: In recent decades, most industrialized countries experienced declining population growth rates caused by declining fertility and associated with rising life expectancy. We analyze the effect of continuing demographic change on medium- and long-run economic growth by setting forth an R&D-based growth model including an analytically tractable demographic structure. Our results show that, in response to demographic change, technological progress and economic growth accelerate in the medium run but slow down in the long run. Numerical investigation reveals that the time period during which technological progress and economic growth are faster than without demographic change can be very long. Since the theoretical predictions for the medium run are consistent with the negative association between population growth and economic growth found in the empirical literature, the present framework can reconcile R&D-based growth theory with the available empirical evidence.
    Keywords: demographic change, technological progress, economic growth, semiendogenous growth theory, transitional dynamics
    JEL: J11 O30 O41
    Date: 2012–09–04
  2. By: Karthik Reddy; Moritz Schularick; Vasiliki Skreta
    Date: 2012
  3. By: Muhammad, Shahbaz; Qazi , Muhammad Adnan Hye; Muhammad, Zeshan
    Abstract: The aim of present study is to re-investigate the impact of renewable energy consumption on economic growth by incorporating capital and labor as potential determinants of production function in case of Pakistan. We have used the ARDL bounds testing and rolling window approach (RWA) for cointegration. The causality analysis is conducted by applying the VECM Granger causality and innovative accounting approaches. The results showed that all the variables are cointegrated for long run relationship. Renewable energy consumption, capital and labor boost economic growth. The causality analysis indicated bidirectional causality between economic growth, renewable energy consumption and capital over the period of 1972Q1-2011Q4. The study opens up new directions for policy makers to explore new sources of energy sustain economic growth.
    Keywords: Renewable Energy; Economic Growth; Rolling Window Approach
    JEL: Q4
    Date: 2012–09–20
  4. By: Hsu, Sara
    Abstract: Overaccumulation of financial capital at the expense of the real sector resulted in falling wages as well as in the most recent global financial crisis. This is a topic of increasing interest, as the idea that some developed economies have reached a stage of overfinancialization has gained some following. In this paper, we lay out a model of overaccumulation, which can be used as a constraint on any growth model.
    Keywords: finance; speculation; overaccumulation; accumulation; growth model; growth
    JEL: O40 G01
    Date: 2012–10–02
  5. By: Holger Strulik; Klaus Prettner; Alexia Prskawetz
    Abstract: Conventional R&D-based growth theory argues that productivity growth is driven by population growth but the data suggest that the erstwhile positive correlation between population and productivity turned negative during the 20th century. In order to resolve this problem we integrate R&D-based innovations into a unified growth framework with micro-founded fertility and schooling behavior. The model explains the historical emergence of R&D-based growth and the subsequent emergence of mass education and the demographic transition. The ongoing child quality-quantity trade-off during the transition explains why in modern economies high growth of productivity and income is associated with low or negative population growth. Because growth in modern economies is based on the education of the workforce, the medium-run prospects for future economic growth – when fertility is going to be below replacement level in virtually all developed countries – are much better than suggested by conventional R&D-based growth theories.
    Keywords: R&D, declining population, fertility, schooling, human capital
    JEL: J13 J24 O10 O30 O40
    Date: 2012–09–18
  6. By: David Castells; Vicente Royuela
    Abstract: The effects of inequality on economic growth depend on several factors. On one hand, they depend on the time horizon considered, on the initial level of income and on its initial distribution. But, on the other hand, as growth and inequality are also uneven across space, it also seems relevant to wonder about the effects of the geographic agglomeration of economic activity. Moreover, it seems relevant to consider not only the levels of inequality and agglomeration, but also their change -their evolution within countries- and the interaction between both processes. By considering different econometric specifications and introducing different measures for agglomeration at country level, especially urbanization and urban concentration rates, this work analyzes how increasing inequality and increasing agglomeration influence economic growth depending on the level of development and on the initial distribution of income. Our results suggest that while high inequality levels are a limiting factor for long-run growth -consistent with previous literature-, increasing inequality and increasing agglomeration have the potential to enhance growth in low-income countries where income distribution remains relatively equal, but can degenerate in congestion diseconomies in high-income ones, especially if income distribution becomes too unequal. The policy implications differ according to the level of development. For low-income countries, on one hand it has been argued that these countries should pursue growth first and then, just when growth is secured, attend distributional aspects; the recurrently argued trade-off between efficiency and equity in economics. This acknowledges the empirical fact that growth is by nature, and at least in the short-run, uneven. This unevenness is crucially spatial too; associated to the geographic concentration of economic activity (WDR 2009). On the other hand, however, it seems also quite clear that inequality becomes, sooner or later, a handicap for growth; developing countries that face high income inequalities are indeed also facing greater obstacles to achieve sustained long-run economic growth. Both facts together mean that while achieving higher economic growth may imply higher inequality due to higher geographic concentration of economic activity in the short-run, it also implies efforts for better income distribution in the long-run as a reinforcing, instead of confronting, objective to economic growth. For high-income countries congestion diseconomies seem to be a relevant issue to be addressed. A more balanced urban system, where small to medium size cities play a fundamental role, seem to be a better strategy than intense urban concentration (OCDE 2009). Finally, the fact that the benefits from agglomeration seem to depend on income distribution is likely to be signaling the relevance of good institutions in the process of development, in particular in what relates to economic geography. Surely the topic deserves more analysis and further research.
    Date: 2012–10
  7. By: Johannes Stephan; Olivier Zieschank
    Abstract: With systemic change in Central East European countries (CEECs), foreign direct investment (FDI) became an important factor for the transition economies. FDI not only played a leading role in privatisation in most transition countries. FDI is also widely assumed to spur restructuring in terms of capital and technology transfer, spillovers, breaking up of national monopolies, and alignment of sectoral specialisation to comparative advantages. This way, FDI is often entrusted with a leading role in the growth and development processes in CEECs. Alas, empirical proof of FDI’s positive contributions to macroeconomic growth remains not robust in an already large body of literature: significant positive growth effects are typically only found by use of very complex methods based on neoclassical growth theory and often only in very specific model specifications. For CEECs, the literature is generally overly optimistic, which is not least used by policy makers (and lobbyists) to argue for active FDI-attracting policies. This contribution revisits the FDI-growth-contribution hypothesis for the case of CEECs during the last 15 years with a particular focus on the individual roles of financial sector FDI and manufacturing industry FDI. The analysis uses the clearest and simplest econometric set-up in the form of a Cobb-Douglas production function that distinguishes between FDI flows and stocks and controls for policy-interventions, human capital endowments, technological activity of firms, and for heterogeneity between countries, sectors, and years. Applying a very large number of alternative models and specifications and post-estimation tests, the analysis concludes for CEECs (i) that there is no robust and convincing independent and effect of neither financial nor manufacturing nor total inward FDI on economic growth if assumed to work via accelerating technical advance (the A in AK-models) in a neoclassical world; and (ii) that robust positive growth contributions become much more convincing as soon as neoclassical assumptions are relaxed, and FDI can affect growth via capital, human capital, and capital formation. For future empirical analysis, this suggests that the search for growth effects by inward FDI in CEECs as economies in transition has to consider indirect effects beyond the strict conceptualisation of neoclassical or new growth theory. For economic policy, the results suggest that FDI may have positive growth effects, but only indirect ones, necessitating a policy-mix beyond the pure attracting of more inward FDI.
    Date: 2012–10
  8. By: Johanna Vogel
    Abstract: This paper examines the empirical relationship between agglomeration and economic growth for a panel of 48 Central and Eastern European regions from 1995 to 2006. By agglomeration, we mean the within-regional concentration of aggregate economic activity, which we measure using the 'topographic' Theil index developed by Bruelhart and Traeger (2005). A transitional growth specification à la Mankiw, Romer and Weil (1992) is augmented with this index and estimated using panel data methods that account for endogeneity and spatial dependence. Our empirical analysis provides evidence of a positive effect of agglomeration as measured by the topographic Theil index on long-run income levels. A one standard-deviation increase in agglomeration is estimated to raise steady-state income per capita by 15%. While this effect is sizeable, it may also imply a trade-off between regional development and within-regional equality for Central and Eastern Europe. Keywords: Agglomeration, regional growth, Central and Eastern Europe, spatial econometrics, panel data econometrics JEL codes: R11, R12, C23, O52
    Date: 2012–10
  9. By: Elsie Echeverri-Carroll; Sofia G. Ayala
    Abstract: Recent theories of economic development view learning processes associated with knowledge externalities as the engines of economic growth. As suggested by Marshall (1920), entrepreneurs congregate next to one another to learn from each other. However, cities may differ in the generation and transmission of entrepreneurial ideas and, therefore, both entrepreneurial externalities and economic growth vary across cities. This process may be conditioned by gender. Indeed, empirical evidence exists that the characteristics of business owners that influence knowledge externalities – such as access to research and development, level of education and experience, among others – differ by gender. In this paper, we examine the effect of gender-specific entrepreneurial externalities, measured by the spatial concentration of male and female entrepreneurs (separately) across cities, on urban employment growth between 1980 and 2007. This paper’s econometric model and choice of control variables follow the city growth literature, which exploits the availability of panel data for metropolitan areas by introducing area fixed effects in the urban growth equation and using start-of-period values to reduce the potential for simultaneity bias (reverse causality).
    Date: 2012–10
  10. By: Maral Kichian
    Abstract: We propose a drifting-coefficient model to empirically study the effect of money on output growth in Canada and to examine the role of prevailing financial conditions for that relationship. We show that such a time-varying approach can be a useful way of modelling the impact of money on growth, and can partly reconcile the lack of concensus in the literature on the question of whether money affects growth. In addition, we find that credit conditions also play a role in that relationship. In particular, there is an additional negative short-run impact of money on growth when credit is not readily available, supporting the precautionary motive for holding money. Finally, money is found to have no effect on output growth in the long-run.
    Keywords: Monetary aggregates; Credit and credit aggregates; Business fluctuations and cycles
    JEL: E44 E51
    Date: 2012
  11. By: Siti Hamizah Mohd (Department of Economics, Universiti Putra Malaysia); Ahmad Zubaidi Baharumshah (Department of Economics, Universiti Putra Malaysia); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper investigates the links between inflation, its uncertainty and economic growth in five ASEAN countries over the period 1980: Q1-2011: Q3. We rely on the Exponential GARCH (EGARCH) model to explore the causal relationship among the three variables. The major findings are: (i) inflation uncertainty increases more in response to positive inflation surprises than to negative surprises in all countries; (ii) inflationary shocks affect positively inflation uncertainty as predicted by the Friedman-Ball hypothesis; (iii) there is no evidence to suggest that inflation uncertainty causes inflation, and; (iv) there is evidence that inflation affects growth negatively, both directly and indirectly (via the inflation uncertainty channel). The indirect effect is clearly stronger as it applies in all countries in the sample.
    Keywords: inflation, inflation uncertainty, output growth, ASEAN
    JEL: C22 E31 E52
    Date: 2012–07
  12. By: Song, Zheng Michael; Storesletten, Kjetil; Wang, Yikai; Zilibotti, Fabrizio
    Abstract: Intergenerational inequality and old-age poverty are salient issues 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
    JEL: E21 E24 G23 H55 J11 O43 R23
    Date: 2012–09
  13. By: Holger Strulik; Katharina Werner
    Abstract: We set up a simple overlapping generation model that allows us to distinguish between life expectancy and active life expectancy. We show that individuals optimally adjust to a longer active life by educating more and, if the labor supply elasticity is high enough, by supplying less labor. When calibrated to US data the model explains the historical evolution of increasing education and declining labor supply (of cohorts born 1850-1950) as an optimal response to increasing active life expectancy. We integrate the theory into a unified growth model and reestablish increasing life expectancy as an engine of long-run economic development.
    Keywords: longevity, active life expectancy, education, hours worked, economic growth
    JEL: E20 I25 J22 O10 O40
    Date: 2012–09–18
  14. By: Jake Johnston; Mark Weisbrot
    Abstract: Venezuela’s current growth is generally described as unsustainable, with various negative scenarios put forth, including spiraling debt, inflation, and balance of payments crises. However, these pessimistic forecasts have been far off the mark for most of the past decade. This paper looks at the available economic data to see if Venezuela’s economic recovery could be sustained, or even accelerated. It finds that Venezuela’s current economic growth is sustainable and could continue at the current pace or higher for many years.
    Keywords: Venezuela,economy,growth,macroeconomics,elections,recession, external debt
    JEL: F F1 F2 F3 F33 F34 I I1 I12 I18 O O4 O47 O5 O54 O57 E E6 E5 E52 E58 E52
    Date: 2012–09
  15. By: Riccardo Cappellin
    Abstract: The role of the growth of new activities in an urban economy can be explained by means of three models: a supply, a demand, and a network model. First, the growth of the supply in a new sector may determine a corresponding increase in the demand and the product of the area considered. Second, cities may internally develop new sectors which may respond to the demand of local consumers and to the needs for intermediate inputs of exporting firms. Third, new knowledge promotes the continuous differentiation of the internal needs and demand of users and the reconversion of the specialized human capabilities and internal supply, thus enhancing the creation of new firms and employment. Economic growth is tightly linked with the turnover of productions and of firms, and it is determined by a Schumpeterian process of creation of new productions, new skills and new preferences which replace traditional productions, skills and preferences. According to this model, the role of national and local governments is to promote the growth of internal demand and to create institutions and physical infrastructures in order to facilitate the process of interactive learning, which leads to knowledge creation in urban areas.
    Date: 2012–10
  16. By: Sabine D'Costa; Enrique Garcilazo; Joaquim Oliveira Martins
    Abstract: We aim to understand the impact of nation-wide structural policies such as product market regulation and employment protection legislation and that of macroeconomic factors such as trade exposure, inflation and the level of government debt on the economic growth of regions in the OECD. In particular we seek to explore how the impact of these nation-wide factors might vary across regions depending on their productivity gap with the most productive region in their country. Our hypothesis is that regional productivity growth is positively related to the productivity growth of the leading region within the country and positively related to the productivity gap with the region that has the highest level of productivity in the country (in other words productivity growth increases with distance to the productivity frontier as lagging regions catch up). We use a policy-augmented growth model in which the effects of macroeconomic and structural policies are estimated in addition to the usual determinants of regional growth, physical and human capital and regional labour market density. Our methodology enables us to test simultaneously the catching-up effect, the influence of the productivity growth of the leading region, and the effect of nation-wide policies and how this might vary with distance to the frontier. We use panel data on 335 regions in 30 OECD countries defined at territorial level 2, taken from the OECD Regional Database, between 1996 and 2007. We first find that the growth of frontier regions in OECD countries has a positive effect on regional growth. Secondly, regional growth increases in the productivity gap with the frontier region within the country. Thirdly, we find that nation-wide factors do affect regional growth, and sometimes differentially according to the productivity gap with the frontier region, advocating in favour of place-based policy responses. We consistently identify a negative effect of product market regulation on regional growth, which is larger for lagging regions than for leading regions. The negative effect of regulation on economic indicators has been empirically demonstrated, however we show that this effect is more detrimental to lagging regions. Employment protection legislation and inflation have a negative impact on regional growth overall, while trade exposure and government debt have a positive effect on regional growth on average. Key words: regional economic growth; structural policies; catching-up; lagging regions. JEL codes: R10; R11.
    Date: 2012–10
  17. By: Martin Lábaj (University of Economics in Bratislava, Faculty of National Economy, Department of Economic Policy); Róbert Kúšik
    Abstract: We identify the sources of long-term economic growth in V4 countries and in Finland in this paper. We show the differences in productivity levels and their development over time, with following decomposition of productivity gap to technological backwardness and inefficiency. We deal with an analysis of particular V4 economies with comparison to Finland. We have revealed relatively high differences in the sources of economic growth as well as in productivity levels. We have showed that the importance of lagging behind in efficiency is high, comparing to traditional focus on technological backwardness.
    Keywords: Economic growth, Total factor productivity, Sources of economic growth, Technological backwardness, Efficiency
    JEL: E20 O11
    Date: 2012–08–12
  18. By: Michelle Sovinsky (University of Zurich); Steven Stern (University of Virginia)
    Abstract: This paper describes and analyzes research on the dynamics of long-term care and suggests directions for the literature to make progress. We discuss sources and causes of dynamics including inertia/state dependence (confounded by unobserved heterogeneity); match-speciÂ…c effects; and costs of changing caregivers. We comment on causes of dynamics including learning/human capital accumulation; burnout; and game playing. We suggest how to deal with endogenous geography; dynamics in discrete and continuous choices; and equilibrium issues (multiple equilibria, dynamic equilibria). Next, we evaluate the advantages of different potential data sources (NLTCS, PSID, AHEAD/HRS, SHARE, ELSA) and identify fiÂ…rst order data problems including noisy measures of wealth and family structure. We suggest some methods to handle econometric problems such as endogeneity (work, geography) and measurement error. Finally, we discuss potential policy implications of dynamics including the effect of dynamics on parameter estimates and direct policy implications of inertia (implications for family welfare, parent welfare, child welfare, and cost of government programs).
    Keywords: Long-Term Care, Dynamic Models
    JEL: C51 C61 J14
    Date: 2012–06
  19. By: Natasa Bilkic (University of Paderborn); Ben Carreras Painter (University of Paderborn); Thomas Gries (University of Paderborn)
    Abstract: As a direct effect of the financial crisis in 2008, public debt began to accumulate rapidly, eventually leading to the European sovereign debt crisis. However, the dramatic increase in government debt is not only happening in European countries. All major G7 countries are experiencing similar developments. What are the implications of this kind of massive deficit and debt policy for the long term stability of these economies? Are there limits in debt-ratios that qualitatively change policy options? While theory can easily illustrate these limits, where are these limits in real economies? This paper examines the relationship between sovereign debt dynamics and capital formation, and accounts for the effects of the 2008 financial crisis on debt sustainability for the four largest advanced economies. We contribute to the literature on fiscal sustainability by framing the problem in an OLG model with government debt, physical capital, endogenous interest rates, and exogenous growth. For the calibration exercise we extract data from the OECD for Germany as a stabilization anchor in Europe, the U.S., the U.K., and Japan for almost two decades before the 2008 crisis. Except for intertemporal preferences all parameters are drawn or directly derived from the OECD database, or endogenously determined within the model. The results of the calibration exercise are alarming for all four countries under consideration. We identify debt ceilings that indicate a sustainable and unsustainable regime. For 2011, all four economies are either close to-, or have already passed the ceiling. The results call for a dramatic re-adjustment in budget policies for a consolidation period and long-term fiscal rules that make it possible to sustain sufficient capital intensity so that these economies can maintain their high income levels. Current conditions are already starting to restrict policy choices. However, the results also make it very clear that none of these economies would survive a second financial crisis such as the one in 2008.
    Keywords: fiscal sustainability, primary deficit, debt ceiling, fiscal rules, OLG, calibration, advanced economies
    JEL: H62 H63 E62 G01
    Date: 2012–09
  20. By: Benedetto Molinari (Department of Economics, Universidad Pablo de Olavide); Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Jose Luis Torres (Universidad de Málaga)
    Abstract: This paper assess the sources of technological progress that determined GDP and labor productivity growth across a group of leading Pacific economies - Australia, Japan, South Korea, and the U.S. - during the period 1980-2006. We consider three alternative sources of technological progress: disembodied and factor-embodied technical change to capital and labor. The contribution to growth of each of these sources is evaluated using both traditional and equilibrium growth accounting procedures. We find that capital accumulation is the main determinant of GDP growth in Australia, Japan and the U.S., whereas the main contribution in South Korea is given by Total Factor Productivity (disembodied technology). In all the considered economies, about half of the contribution to growth of capital-embodied technical change comes from Information and Communication Technologies.
    Keywords: Output Growth, Labor Productivity Growth, Investment-Specific Technical Change, Neutral Technology, Human Capital Accumulation
    JEL: O3 O4
    Date: 2012–09
  21. By: branimir Jovanovic (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper investigates which factors determine how countries recover after crises, on a sample of 47 financial, currency and sovereign debt crises in 22 countries from the last thirty years, including the recent Great Recession. Several findings emerge. First, the most important factors which are associated with higher post-crisis growth are expansionary monetary and fiscal policy, exchange rate depreciation and prudent banking regulation. Second, the Great Recession does not seem to differ from the other crises in terms of how the policy actions effect the recovery, and the recovery after it is slower because of the global nature of this crisis. Third, the fiscal multiplier does not seem to be smaller during episodes of high public debt, and public debt does not seem to affect the speed of recovery through channels other than the government spending, which can be considered as an argument in favour of pursuing expansionary fiscal policy during crises even in highly leveraged countries.
    Keywords: crises, recovery, monetary policy, ?scal policy, banking regulation
    JEL: E52 E62 E63 G01
    Date: 2012–10–05
  22. By: Gianni Guastella; Francesco Timpano
    Abstract: Regional Growth; Economic Convergence; Non-linear models JEL: R11, R58 Regional economic development is driven by the accumulation of production factors. More traditional factors like labour and physical capital are accumulated under the law of diminishing returns. This, in turn, allows less developed regions to better perform. Recent branches of theoretical and empirical literature have paid attention to the role of increasing returns in an attempt to explain the persistence in regional economic disparities. Increasing returns are commonly attributed either to the accumulation of non- traditional inputs such as human and knowledge capital or to the presence of local externalities generated by the spatial concentration of economic activities. The aim of the present paper is to address the importance of both decreasing and increasing returns for the economic growth of European regions. While economies will definitively converge in the long-run if production is characterized by decreasing returns, divergence is the likely outcome in presence of increasing returns. As regional growth is probably the result of a combination of both, from a policy perspective it is important to understand where the sooner stops and the latter starts. In this paper the economic performance of 186 European regions is analysed by using the ordinary growth regression approach. An empirical specification which simultaneously accounts for the presence of both decreasing and increasing returns is derived. The study is intended to examine the extent to which regional development originates from the (un)balance between convergence, driven by diminishing returns and divergence, boosted by increasing returns. Results indicate that the accumulation of traditional inputs leads the economic development of less favoured areas while the presence of increasing returns plays a more crucial role in developed regions. More in the detail increasing returns seem to be generated by the accumulation of knowledge and human capital while there is no clear evidence of agglomeration externalities. By using a non-linear specification for the growth equation it is also found evidence of important threshold effects in entering the stage of development characterized by increasing returns. Regional development process is accordingly depicted as a far more complex process than what the simple dualism between increasing and decreasing returns may help to figure out, with very important implications for policy.
    Date: 2012–10
  23. By: Halicioglu, Ferda
    Abstract: In order to test the existence of Thirlwall’s law for Turkey during the period of 1980-2008, bounds test approach to cointegration is applied. The empirical results suggest that Thirlwall’s law holds for Turkey. This study also suggests some policy recommendations to curb the deficits in the balance-of-payments.
    Keywords: Thirlwall’s law; balance-of-payments constraint; cointegration; growth; import elasticity; Turkey
    JEL: E12 O24 C22 F43
    Date: 2012

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