nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2013‒01‒07
nineteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Financial instability, financial openness and economic growth in african countries By Batuo Enowbi, Michael; Kupukile, Mlambo
  2. Non-linear Effects of Taxation on Growth By Jaimovich, Nir; Rebelo, Sérgio
  3. Entrepreneurship and economic growth in a panel of countries By Berthold, Norbert; Gründler, Klaus
  4. Innovation Economy, Productive Public Expenditures and Economic Growth By Oscar Afonso; Sara Monteiro; Maria Thompson
  5. Growth Empirics in Panel Data under Model Uncertainty and Weak Exogeneity By Enrique Moral-Benito
  6. Longevity, pollution and growth By Natacha Raffin; Thomas Seegmuller
  7. Optimal Factor Tax Incidence in Two-sector Human Capital-based Models By Been-Lon Chen; Chia-Hui Lu
  8. Unproductive Education in a Model of Corruption and Growth By M. Emranul Haque
  9. Economic Growth, Energy Consumption, Financial Development, International Trade and CO2 Emissions in Indonesia By Muhammad, Shahbaz; Qazi Muhammad, Adnan Hye; Aviral Kumar, Tiwari
  10. Catching Up and Falling Behind By Nancy L. Stokey
  11. Monetary versus non-monetary pro-poor growth: Evidence from rural Ethiopia between 2004 and 2009 By Kacem, Rami Ben Haj
  12. Trade openness reduces growth volatility when countries are well diversified By Mona Haddad; Jamus Jerome Lim; Cosimo Pancaro; Christian Saborowski
  13. Sectoral Bubbles and Endogenous Growth By Pengfei Wang; Jianjun Miao
  14. The Trinity Growth Theory: A Theory of Wealth and Poverty By LIM Chong Yah
  15. Growth and Income Redistribution Components of Changes in Poverty: A Decomposition Analysis for Ireland, 1987-2005 By Wasiu Adekunle Are
  16. The relationship between public education expenditure and economic growth: The case of India By Sayantan Ghosh Dastidar; Sushil Mohan; Monojit Chatterji
  17. Bank efficiency, market concentration and economic growth in the European Union By Cândida Ferreira
  18. Was Economic Growth in Australia Good for the Income-Poor? and for the Multidimensionally-Poor? By Francisco Azpitarte
  19. Determinants of fiscal budget volatility in old versus new EU member states By Eugenia-Ramona Mara

  1. By: Batuo Enowbi, Michael; Kupukile, Mlambo
    Abstract: In the aftermath of the recent global financial crisis, the implication of financial liberalisation for stability and economic growth has come under increasing scrutiny. One strand of literature posits a positive relationship between financial liberalisation and economic growth and development. However, others emphasise that the link between financial liberalisation is intrinsically associated with financial instability which may be harmful to economic growth and development. In this study, we offer an empirical analysis assessing the relationship between financial instability, financial liberalisation, financial development and economic growth based on a dataset of 41 African countries spanning the years 1985-2010. The results suggest that the link between financial development and liberalisation has a positive and significant effect on financial instability but the latter has a harmful effect on economic growth, which are more pronounced in the pre- financial liberalisation periods than in the post-liberalisation.
    Keywords: Economic Growth; Financial Development; Financial instability;Africa
    JEL: G1 O55 O47 B22 O16 C33 G01
    Date: 2012–08
  2. By: Jaimovich, Nir; Rebelo, Sérgio
    Abstract: We study a model in which the effects of taxation on growth are highly non-linear. Marginal increases in tax rates have a small growth impact when tax rates are low or moderate. When tax rates are high, further tax hikes have a large, negative impact on growth performance. We argue that this non-linearity is consistent with the empirical evidence on the effect of taxation and other disincentives to investment and innovation on economic growth.
    Keywords: growth; taxes
    JEL: H2 O4
    Date: 2012–12
  3. By: Berthold, Norbert; Gründler, Klaus
    Abstract: We study the effect of entrepreneurship on economic growth. First, we illustrate that entrepreneurship affects the investment decision in horizontal and vertical innovations within endogenous growth models. As a direct consequence, the level of entrepreneurship exerts significant growth stimuli. We then evaluate this prediction empirically applying 3SLS estimations based on the approach proposed by Barro (1991, 2000, 2003). Using data of 188 countries between 1980-2010, we show that entrepreneurship has a significantly positive effect on growth, even when controlling for a wide range of commonly used political and state variables suggested by the standard growth model. Our sensitivity analysis that takes into account different proxies of entrepreneurship supports our results. It turns out that the level of uncertainty avoidance - perhaps the purest proxy of entrepreneurship - excerts negative effects on economic growth. The extent of entrepreneurship can thus be considered an adequate additional determinant in growth models to explain differences in per capita income. --
    Keywords: Entrepreneurship,Economic Growth
    JEL: L26 O31 O47
    Date: 2012
  4. By: Oscar Afonso (Universidade do Porto - CEFUP); Sara Monteiro (Nice Sophia Antipolis University - CEMAFI); Maria Thompson (University of Minho - NIPE)
    Abstract: Innovation is the main engine of growth in an increasing number of economies. Innovation economies are, according to the Quadruple Helix (QH) Innovation Theory, sustained by four pilars – Firms, Academia, Government and Consumers –, all operating in a systemic, interactive environment. We provide a model that gives analytical body to the QH theory and links formally innovation to economic growth. We aim to emphasise the equally important roles of the four helices sustaining an innovation economy and its long run growth. In particular, given the downwards pressure on Government expenditures, we analyse the effects of an increase in public expenditures on economic growth, which we find positive in the short, medium and long-run.
    Keywords: Innovation Economy, Consumers, Quadruple Helix, Productive Public Expenditures, Economic Growth
    JEL: O10 O31 C63
    Date: 2012
  5. By: Enrique Moral-Benito (Banco de España)
    Abstract: This paper considers panel growth regressions in the presence of model uncertainty and reverse causality concerns. For this purpose, my econometric framework combines Bayesian Model Averaging with a suitable likelihood function for dynamic panel models with weakly exogenous regressors and fixed effects. An application of this econometric methodology to a panel of countries over the 1960-2000 period indicates that there is no robust determinant of economic growth and that the rate of conditional convergence is indistinguishable from zero.
    Keywords: growth regressions, panel data, model uncertainty, bayesian model averaging
    JEL: O40 C23 C11
    Date: 2012–12
  6. By: Natacha Raffin (University Paris Ouest Nanterre la Défense, EconomiX and Climate Economics Chair.); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS.)
    Abstract: We analyze the interplay between longevity, pollution and growth. We develop an OLG model where longevity, pollution and growth are endogenous. The authorities may provide two types of public services, public health and environmental maintenance, that participate to increase agents’ life expectancy and to sustain growth in the long term. We show that global dynamics might be featured by a high growth rate equilibrium, associated with longer life expectancy and a environmental poverty trap. We examine changes in public policies: increasing public intervention on health or environmental maintenance display opposite effects on global dynamics, i.e. on the size of the trap and on the level of the stable balanced growth path. On the contrary, each type of public policy induces a negative leverage on the long run rate of growth.
    Keywords: Life expectancy; Pollution; Health; Growth.
    JEL: I15 O44 Q56
    Date: 2012–10–30
  7. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chia-Hui Lu (Department of Economics, National Taipei University)
    Abstract: This paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent’s learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure.
    Keywords: two-sector model, human capital, optimal factor tax incidence
    JEL: E62 H22 O41
    Date: 2012–12
  8. By: M. Emranul Haque
    Abstract: This paper presents a dynamic general equilibrium analysis of education, public sector corruption and economic growth. In an economy with government intervention along with physical and human capital accumulation, state-appointed bureaucrats are responsible for procuring public goods, which contribute to productive efficiency. Corruption arises because of an opportunity for bureaucrats to embezzle public funds. Education has two opposing effects, a positive productivity enhancing effect and a negative corruption efficiency of bureaucrats. If the latter dominates the former, the incentive for bureaucrats to acquire education rises. The net effect may result in an insignificant (or even negative) effect of human capital on growth. Our results are straightforward. First, corruption and development are determined jointly in a relationship that is two-way causal: bureaucratic malfeasance both influences and is influenced by economic activity and human capital accumulation. Second, this two-way causality gives rise to threshold effects and multiple development regimes with very different equilibrium properties: in low stages of development there is a unique equilibrium with high corruption where higher human capital cannot get the economy out of poverty trap, in high stages of development there is a unique equilibrium with low corruption where human capital can exert its influence, and in intermediate stages of development there are both types of equilibrium. Third, transition between regimes may or may not be feasible and it is possible for a development trap to occur.
    Date: 2012
  9. By: Muhammad, Shahbaz; Qazi Muhammad, Adnan Hye; Aviral Kumar, Tiwari
    Abstract: This study examines the linkages among economic growth, energy consumption, financial development, trade openness and CO2 emissions over the period of 1975Q1-2011Q4 in the case of Indonesia. The stationary analysis is performed by using Zivot-Andrews structural break unit root test and the ARDL bounds testing approach for a long run relationship between the series in the presence of structural breaks. The causal relation between the concerned variable is examined by the VECM Granger causality technique and robustness of causal analysis is tested by innovative accounting approach (IAA). Our results confirm that the variables are cointegrated; it means that the long run relationship exists in the presence of structural break stemming in the series. The empirical findings indicate that economic growth and energy consumption increases CO2 emissions, while financial development and trade openness compact it. The VECM causality analysis has shown the feedback hypothesis between energy consumption and CO2 emissions. Economic growth and CO2 emissions are also interrelated i.e. bidirectional causality. Financial development Granger causes CO2 emissions. The study opens up a new policy insights to control the environment from degradation by using energy efficient technologies. Financial development and trade openness can also play their role in improving the environmental quality.
    Keywords: Growth; Energy; Financial Development; CO2 Emissions
    JEL: Q4
    Date: 2012–12–10
  10. By: Nancy L. Stokey
    Abstract: This paper studies the interaction between technology, a publicly available input that flows in from abroad, and human capital, a private input that is accumulated domestically, as the twin engines of growth in a developing economy. The model displays two types of long run behavior, depending on policies and initial conditions. One is sustained growth, where the economy keeps pace with the technology frontier. The other is stagnation, where the economy converges to a minimal technology level that is independent of the world frontier. In a calibrated version of the model, transition paths after a policy change can display rapid growth, as in modern growth 'miracles.' In these economies policies that promote technology inflows are much more effective than subsidies to human capital accumulation in accelerating growth. A policy reversal produces a 'lost decade,' a period of slow growth that permanently reduces the level of income and consumption.
    JEL: O38 O40
    Date: 2012–12
  11. By: Kacem, Rami Ben Haj
    Abstract: The aim of this paper is to contribute to the debate on the pro-poor growth measurement techniques using monetary versus non-monetary indicators. In this context, an alternative method for introducing non-monetary indicators into monetary pro-poor growth analysis is presented. The method is based on the definition of a Conditional Growth Incidence Curve for each group of households with a common selected non-monetary characteristic. Additional information provided by the Conditional Growth Incidence Curve is useful for a more detailed pro-poor growth analysis. Empirical illustration using data from rural Ethiopia between 2004 and 2009 shows the utility and the limits of each measurement technique. --
    Keywords: pro-poor growth,multidimensionality of poverty,growth incidence curve
    JEL: D30 I30 O12
    Date: 2012
  12. By: Mona Haddad (The World Bank); Jamus Jerome Lim (The World Bank); Cosimo Pancaro (European Central Bank); Christian Saborowski (International Monetary Fund)
    Abstract: This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export concentration measures, we present strong evidence pointing to an important role for export diversification in conditioning the effect of trade openness on growth volatility. Indeed, the effect of openness on volatility is shown to be negative for a significant proportion of countries with relatively diversified export baskets. JEL Classification: F15, F43, O24
    Keywords: Export diversification, growth volatility, trade openness
    Date: 2012–11
  13. By: Pengfei Wang (Hong Kong University of Science and Tech); Jianjun Miao (Boston University)
    Abstract: Stock price bubbles are often on productive assets and occur in a sector of the economy. In addition, their occurence is often accompanied by credit booms. Incorporating these features, we provide a two-sector endogenous growth model with credit-driven stock price bubbles. Bubbles have a credit easing effect in that they relax collateral constraints and improve investment efficiency. Sectoral bubbles also have a capital reallocation effect in the sense that bubbles in a sector attract more capital to be reallocated to that sector. Their impact on economic growth depends on the interplay between these two effects.
    Date: 2012
  14. By: LIM Chong Yah (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore)
    Abstract: A presentation of the Trinity Growth Theory, decomposed into its three parts, is made: the EGOIN Theory, the Triple C Theory and the S Curve Theory. Professor Lim Chong Yah uses the Trinity Growth Theory to explain why growth levels and why growth rates differ among nations, why these two important world economic phenomena also exist among different provinces and cities within a nation, and why the world economy, viewed against world economic history, has grown so unprecedentedly in the last 60 years after World War II.
    Keywords: Growth theory
    JEL: O40
    Date: 2012–03
  15. By: Wasiu Adekunle Are (University College Dublin)
    Abstract: This study analysed the contribution of economic growth and redistribution components to aggregate poverty changes in Ireland from 1987-2005, using the Shapley value decomposition approach. The analysis used the household disposable income data from the Household Budget Survey to calculate poverty indices. The result of the Shapley value decomposition of poverty changes into growth and redistribution components revealed that the growth component dominates the redistribution component in bringing about the decline in poverty. This suggests that the drastic fall in absolute poverty over the survey period could be attributed to the increase in the household mean income rather than the redistributive policies of government transfer and income tax systems. We also investigated the extent to which economic growth experienced over the survey period has been pro- poor, by using the Growth Incidence Curve proposed by Ravallion and Chen (2003). It was found that economic growth was slightly pro-poor between 1987 and 1994 and generally anti-poor between 1994 and 1999.
    Keywords: economic growth, inequality, poverty decomposition, shapley value
    JEL: D31 D63 I32 P36
    Date: 2012–12–20
  16. By: Sayantan Ghosh Dastidar; Sushil Mohan; Monojit Chatterji
    Abstract: The paper reviews the theoretical and the empirical case for public investment in education in India. Though the theoretical literature provides a backing for such a policy, the empirical literature fails to find a robust relation between education expenditure and growth. Expenditure on education is a necessary but not a sufficient condition for growth. It seems that the effectiveness of education expenditure depends on the institutional and labour market characteristics of the economy. The effectiveness of education investments also depends on other factors such as trade openness. Due to these aforesaid factors, we argue that the empirical relation between education expenditure and growth for India has been inconsistent.
    Keywords: Public education expenditure, economic growth, trade openness, India
    JEL: E60 E62 H52 I25
    Date: 2012–12
  17. By: Cândida Ferreira
    Abstract: Well-functioning financial markets and banking institutions are usually considered to be a condition favourable to economic growth. The importance of bank efficiency and bank market concentration has also been the object of discussion, with the general belief that while they are of particular relevance in the context of the European Union, there is no consensus on their specific roles. This paper aims to study the effects on economic growth of the efficiency of the banking institutions, measured through Data Envelopment Analysis (DEA), and also of the concentration of the bank markets, measured by the percentage share of the total assets held by the three largest banking institutions (C3) and the Herfindahl-Hirschman Index (HHI). Considering a panel of all 27 EU countries for the time period between 1996 and 2008, the study analyses the influence of these bank and market conditions not only on the Gross Domestic Product (GDP) but also on its components: the final consumption expenditure, the gross fixed capital formation, the export of goods and services and the import of goods and services. The main findings point to the generally positive influence of bank cost efficiency on economic growth. More precisely, this influence is statistically significant for GDP and particularly with respect to the gross fixed capital formation. With regard to the bank market concentration, a generally negative influence is revealed, not only on GDP, but also on its components and is statistically more significant for the gross fixed capital formation, as well as for the export and import of goods and services. JEL Classification: G21; F43; D4; L11
    Keywords: Bank efficiency, market concentration, economic growth, European Union.
    Date: 2012–10
  18. By: Francisco Azpitarte (Melbourne Institute of Applied Economic and Social Research, University of Melbourne, Victoria 3010, Australia)
    Abstract: We investigate the pro-poorness of Australias strong economic growth in the fi…rst decade of the XXI century using anonymous and non-anonymous approaches to the measurement of pro-poor growth. The sensitivity of pro-poor growth evaluations to the de…nition of poverty is evaluated by comparing the results for the standard income-poverty measure with those based on a multidimensional de…nition of poverty. We …nd that Australian growth in this period can be only categorized as pro-poor according to the weakest concept of pro-poorness that does not require any bias of growth towards the poor. In addition, our results indicate that growth was clearly more pro-income poor than pro-multidimensionally poor. Counterfactual distribution analysis reveals that di¤erences in the distribution of health between these two groups is the non-income factor that most contributes to explain this result.
    Keywords: Growth, pro-poor, anonymity axiom.
    JEL: D3 I32
    Date: 2012–11
  19. By: Eugenia-Ramona Mara
    Abstract: In this study we perform an analysis of the volatility of the budget deficit for EU countries. We address this issue starting from the new requirements of fiscal discipline imposed by the Treaty on Stability, Coordination and Governance adopted by 25 European Union member states and taking into account the economic crisis impact. The major purpose of this study is to identify the most significant determinants of budget deficit volatility in a comparative study for old EU member states and New Member States (NMS). This study aims to test the impact of macroeconomic variables such as public expenditures, economic growth rate, and unemployment on the budget balance volatility, based on panel data. The final purpose of the article is to reveal the strategies to stop the immense increase in fiscal deficits and to regain fiscal stability to fulfil the new rules of fiscal governance. We anticipate that the implementation of this new fiscal discipline requires a more efficient public sector for both old and NMS and a reconsideration of state intervention in the economy. JEL Classification: H62; E62; H3; H61;
    Keywords: budget deficit; fiscal policy; economic growth.
    Date: 2012–09

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