nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2012‒12‒06
eighteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Bank credit and economic growth By Leitão, Nuno Carlos
  2. Spurious Regressions and Near-Multicollinearity, with an Application to Aid, Policies and Growth. By Jean-Bernard Chatelain; Kirsten Ralf
  3. Technological Opportunity, Long-Run Growth, and Convergence By Jakub Growiec; Ingmar Schumacher
  4. The (Declining) Role of Households in Sustaining China's Economy: Structural Path Analysis for 1997-2007 By Yang, Ling; Thurlow, James; Lahr, Michael L.
  5. Knowledge and Growth in the Very Long Run By Holger Strulik
  6. Gibrat’s law for cities, growth regressions and sample size By González-Val, Rafael; Lanaspa, Luis; Sanz, Fernando
  7. Learning How to Export By Paul S. Segerstrom; Ignat Stepanok
  8. On the Link Between the Volatility and Skewness of Growth By Geert Bekaert; Alexander Popov
  9. Reserve Accumulation, Growth and Financial Crises By Benigno, Gianluca; Fornaro, Luca
  10. Stock Return and Cash Flow Predictability: The Role of Volatility Risk By Tim Bollerslev; Lai Xu; Hao Zhou
  11. Comparing good and bad borrowing in developing countries - a study of twin cases By Andreas Freytag; Martin Paldam
  12. Aid, Growth, and Jobs By Fields, Gary
  13. Empirical analysis of regional economic performance in Russia: Human capital perspective By Kufenko, Vadim
  14. Environmental Kuznets Curve in an Open Economy: A Bounds Testing and Causality Analysis for Tunisia By Muhammad, Shahbaz; Naceur , Khraief; Gazi Salah , Uddin
  15. Economic growth and environmental efficiency: Evidence from U.S. regions By Halkos, George; Tzeremes, Nickolaos
  16. A Dynamic Analysis of Regulation and Productivity in Retail Trade By Maican, Florin; Orth, Matilda
  17. The Optimal Carbon Tax and Economic Growth: Additive versus Multiplicative Damages By Armon Rezai; Frederick van der Ploeg; Cees Withagen
  18. Use Less, Pay More: Can Climate Policy Address the Unfortunate Event for Being Poor? By Lucas Bretschger; Nujin Suphaphiphat

  1. By: Leitão, Nuno Carlos
    Abstract: This manuscript examines the link between bank lending and economic growth for European Union (EU-27). The period was examined, between 1990 and 2010. We apply a dynamic panel data (GMM-System estimator). This estimator permits the researchers to solve the problems of serial correlation, heteroskedasticity and endogeneity for some explanatory variables .As the results show, savings indeed promotes growth. The inflation has a negative impact on economic growth as previous studies. Our results show that domestic credit discourages the growth.
    Keywords: Bank credit; economic growth; and panel data
    JEL: G2 O16 C33
    Date: 2012–11–15
  2. By: Jean-Bernard Chatelain (Centre d'Economie de la Sorbonne - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur (ESCE))
    Abstract: Explanatory variables with simple correlation coefficients with the dependent variable below 0.1 in absolute value (such as aid with economic growth) may have very large and statistically significant estimated parameters in multiple regressions, which are unifortunately "outliers driven" or spurious. This is obtained by including another regressor which is highly correlated with the initial regressor, such as a lag, a square or interaction terms of this regressor. The analysis is applied on the "Botswana outliers driven" Burnside and Dollar [2000] article which found that aid had an effect on growth only for countries achieving "good" macroeconomic policies.
    Keywords: Near-Multicollinearity, student t-statistic, spurious regressions, Ceteris paribus, classical suppressor, parameter inflation factor, growth, foreign aid.
    JEL: C12 O19 P45
    Date: 2012–11
  3. By: Jakub Growiec (Warsaw School of Economics - Institut of Econometrics); Ingmar Schumacher (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)
    Abstract: We derive a R&D-based growth model where the rate of technological progress depends, inter alia, on the amount of technological opportunity. Incremental innovations provide direct increases to the knowledge stock but they reduce technological opportunity and thus the potential for further improvements. Technological opportunity is renewed by radical innovations, which have no direct impact on factor productivity. We study both the market equilibrium and the social planner allocation in this economy. Investigating the model for its implications on economic growth we find: (i) in the long run, a balanced growth path requires that the returns to radical innovations are at least as large as those of the incremental ones; (ii) the transition need not be monotonic. We show under which conditions our model generates endogenous cycles via complex dynamics without resorting to uncertainty; (iii) the calibrated model exhibits substantial quantitative differences between the market outcome and the social planner allocation.
    Date: 2012–11–19
  4. By: Yang, Ling; Thurlow, James; Lahr, Michael L.
    Abstract: Current explanations for private consumption.s diminished role in China focus on the expansion of exports and investments. Using structural path analysis, we find additional contributing factors. First, growth patterns during 1997-2007 favoured sectors wi
    Keywords: structural path analysis, economic growth, private consumption, China
    Date: 2012
  5. By: Holger Strulik
    Abstract: This paper proposes a theory for the gradual evolution of knowledge diffusion and growth over the very long run. A feedback mechanism between capital accumulation and the ease of knowledge diffusion explains a long epoch of (quasi-) stasis and an epoch of high growth linked by a gradual economic take-off. It is shown how the feedback mechanism can explain the Great Divergence, the failure of less developed countries to attract capital from abroad, and a productivity slowdown in fully developed countries. An extension towards a two-region world economy shows robustness of the gradual take-off and other interesting interaction between forerunners and followers of the Industrial Revolution.
    Keywords: Industrial Revolution; Endogenous Growth; Knowledge Diffusion; Productivity Slowdown; Convergence; Divergence.
    JEL: O10 O30 O40 E22
    Date: 2012–11–12
  6. By: González-Val, Rafael; Lanaspa, Luis; Sanz, Fernando
    Abstract: This paper uses un-truncated city population data from six countries (the United States, Spain, Italy, France, England and Japan) to illustrate how parametric growth regressions can lead to biased results when testing for Gibrat’s law in city size distributions. The OLS results show non-monotonic behaviours depending on the sample size. Moreover, it is possible to find a critical sample size from which we reject Gibrat’s law.
    Keywords: Gibrat’s law; city size distribution; urban growth
    JEL: R00 R12 R11
    Date: 2012–11
  7. By: Paul S. Segerstrom; Ignat Stepanok
    Abstract: In this paper, we present a standard quality ladders endogenous growth model with one significant new assumption, that it takes time for firms to learn how to export. We show that this model without Melitz-type assumptions can account for all the evidence that the Melitz (2003) model was designed to explain plus much evidence that the Melitz model can not account for. In particular, consistent with the empirical evidence we find that trade liberalization leads to a higher exit rate of firms, that exporters charge higher prices for their products as well as higher markups, and that many large firms do not export. We also find that trade iberalization promotes economic growth and that it has the opposite effect of retarding economic growth in a closely comparable growth model with Melitz-type assumptions
    Keywords: Trade liberalization, heterogeneous firms, quality ladders, endogenous growth
    JEL: F12 F13 F43 O31 O41
    Date: 2012–10
  8. By: Geert Bekaert; Alexander Popov
    Abstract: In a sample of 110 countries, we document a positive relation between the volatility and skewness of growth in the cross-section, but a negative relation in panel data with country fixed effects. The negative relation between volatility and skewness in panel data is driven by business cycle variation in rich countries. The long-run cross-sectional relation is related to two distinct phenomena: sudden and short-lived growth spurts in mostly developing countries, and sharp crises in mostly developed countries, following the build-up of leverage during low-volatility periods. The former phenomenon is driven by one of the following events in mostly developing countries: industrialization, macroeconomic stabilisation, and the discovery and exploitation of natural resources. The latter phenomenon is consistent with recent theories of financial frictions.
    JEL: E32 G10 O10
    Date: 2012–11
  9. By: Benigno, Gianluca; Fornaro, Luca
    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. This generates a positive link between reserve accumulation, growth and current account surpluses. 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% of permanent consumption equivalent.
    Keywords: financial crises; foreign reserve accumulation; gross capital flows; growth
    JEL: F31 F32 F41 F43
    Date: 2012–11
  10. By: Tim Bollerslev (Duke University, NBER and CREATES); Lai Xu (Duke University); Hao Zhou (Federal Reserve Board)
    Abstract: We examine the joint predictability of return and cash flow within a present value framework, by imposing the implications from a long-run risk model that allow for both time-varying volatility and volatility uncertainty. We provide new evidence that the expected return variation and the variance risk premium positively forecast both short-horizon returns and dividend growth rates. We also confirm that dividend yield positively forecasts long-horizon returns, but that it cannot forecast dividend growth rates. Our equilibrium-based “structural” factor GARCH model permits much more accurate inference than the reduced form VAR and univariate regression procedures traditionally employed in the literature. The model also allows for the direct estimation of the underlying economic mechanisms, including a new volatility leverage effect, the persistence of the latent long-run growth component and the two latent volatility factors, as well as the contemporaneous impacts of the underlying “structural” shocks.
    Keywords: Return and dividend growth predictability, variance risk premium, expected variation, long-run risk, equilibrium pricing, stochastic volatility and uncertainty, reduced form VAR, “structural” factor GARCH
    JEL: G12 G13 C12 C13
    Date: 2012–11–16
  11. By: Andreas Freytag (Friedrich-Schiller-University Jena, and University of Stellenbosch); Martin Paldam (Aarhus University, and Deakin University, Melbourne)
    Abstract: Some developing countries borrow abroad and experience good growth (above 2 %), which we call good growth, while others borrow and have poor growth (below 1 %), which we label as bad growth. The data comprise all 443 available observations of borrowing for one 5-year period and average growth rates for the following 10-year period. First, we confirm the standard result: The relation between borrowing and growth is negative, but explains little of the variations in the growth rate. Second, we select a subset of 59 twins of LDCs with matching borrowing (shares of GDP) in the same period. One twin has good growth and the other bad growth. The two sets are compared over a total of 12 main indicators from different fields. The good cases occur in countries with more economic and political freedom; also they are somewhat more developed, and have fewer natural resources. While this pattern is strong between samples, it is weak within samples.
    Date: 2012
  12. By: Fields, Gary
    Abstract: Various development objectives are worthy, but to my mind, one objective dominates all others: reducing the scourge of absolute economic misery in the world. In this paper, I focus on an important but relatively underemphasized approach to poverty reducti
    Keywords: foreign assistance, economic growth, employment, poverty, developing countries
    Date: 2012
  13. By: Kufenko, Vadim
    Abstract: Having shown the important role of the Russian economy in the ex-USSR region by causality tests, we proceed to empirical analysis of growth and performance of the Russian regions. A dynamic panel data approach enabled us to obtain elasticity coefficients on proxies for convergence, physical capital, labour and innovation. After including human capital in the reformulated model we resolve endogeneity and reverse causality by introducing two instrumental variable approaches. Taking advantage of the Unified State Exam data we managed to successfully endogenize human capital by number (and share) of outperforming students and by the education index. The second approach helped to improve causality between instruments and human capital: the dates of first university foundation and distance to Moscow successfully explains human capital variations due to historical and spatial characteristics of a given region. --
    Keywords: growth regressions,regional analysis,human capital,system GMM,instrumental variables
    JEL: C01 E24 O40 O47
    Date: 2012
  14. By: Muhammad, Shahbaz; Naceur , Khraief; Gazi Salah , Uddin
    Abstract: The aim of this paper is to investigate the existence of environmental Kuznets curve (EKC) in an open economy like Tunisia using annual time series data for the period of 1971-2010. The ARDL bounds testing approach to cointegration is applied to test long run relationship in the presence of structural breaks and vector error correction model (VECM) to detect the causality among the variables. The robustness of causality analysis has been tested by applying the innovative accounting approach (IAA). The findings of this paper confirmed the long run relationship between economic growth, energy consumption, trade openness and CO2 emissions in Tunisian Economy. The results also indicated the existence of EKC confirmed by the VECM and IAA approaches. The study has significant contribution for policy implications to curtail energy pollutants by implementing environment friendly regulations to sustain the economic development in Tunisia.
    Keywords: EKC; Energy; Tunisia
    JEL: O1 Q4
    Date: 2012–11–01
  15. By: Halkos, George; Tzeremes, Nickolaos
    Abstract: This paper proposes a conditional directional distance function model in order to examine the link between regional environmental efficiency and GDP per capita levels. As an illustrative example we apply our model to USA regional data revealing an inverted ‘U’ shape relationship between regional environmental efficiency and per capita income. The results derived from a non-parametric regression indicate a turning point at 49,000 dollars.
    Keywords: Regional environmental efficiency; Directional distance function; Conditional measures; U.S. regions
    JEL: Q50 C14 Q56 R11
    Date: 2012–11
  16. By: Maican, Florin (Research Institute of Industrial Economics (IFN)); Orth, Matilda (Research Institute of Industrial Economics (IFN))
    Abstract: Liberalization is widely recognized to drive productivity growth. Retail trade is often thought to substantially contribute to the frequently debated productivity gap between Europe and the U.S. In Europe, entry regulations empower local authorities to decide on the entry of new stores. We use a dynamic structural model and data on all retail stores in Sweden during the period 1996–2002 to quantify the effect of entry regulations on productivity in retail. The results show that the approval of an additional application by local authorities increases median productivity by approximately 2 percent in most subsectors. A stricter regulation in terms of one fewer approved application in each local market corresponds to an annual economic cost for the retail trade sector of nearly 10 percent of total annual capital investments. Our findings suggest that a restrictive entry regulation limits the role of entry and exit in local market dynamics and productivity growth.
    Keywords: Retail Trade; Regulation; Imperfect Competition; Dynamic Structural Model; Productivity Decomposition
    JEL: L11 L81 L88 O30
    Date: 2012–11–14
  17. By: Armon Rezai; Frederick van der Ploeg; Cees Withagen
    Abstract: In a calibrated integrated assessment model we investigate the differential 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 of energy 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 fuelto the carbon-free backstop and leaves less fossil fuel in situ. This is in contrast to a partial equilibrium analysis with damages 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: 2012–09–10
  18. By: Lucas Bretschger; Nujin Suphaphiphat
    Abstract: The paper develops a two-region endogenous growth model with climate change affecting the countries' capital stocks negatively. We compare two different policies aimed at supporting less developed countries: climate mitigation by rich countries, which diminishes the increase in stock pollution and hence capital depreciation, and income transfers in the tradition of development aid. Under a mild set of assumptions we find that active climate policies are more efficient for rich economies and also, remarkably, better for poor countries than additonial development aid. The main reason is the difference between the two policies with respect to their effects on economic growth. The results are robust with respect to possible model extensions.
    Keywords: Climate policy, development aid, endogenous growth, stock pollution
    JEL: O10 Q52 Q54
    Date: 2012–06

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