nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2013‒02‒03
six papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Creative Destruction and Unemployment in an Open Economy Model By Ignat Stepanok
  2. Banks, free banks, and U.S. economic growth By Matthew Jaremski; Peter Rousseau
  3. Trend Growth and Learning About Monetary Policy Rules in a Two-Block World Economy By Eric Schaling; Mewael F. Tesfaselassie
  4. Does Education Matter for Economic Growth? By Delgado, Michael S.; Henderson, Daniel J.; Parmeter, Christopher F.
  5. Who Benefits from Financial Development? New Methods, New Evidence By : Daniel J. Henderson; Chris Papageorgiou; Christopher F. Parmeter
  6. The Easterlin illusion: economic growth does go with greater happiness By Veenhoven, Ruut; Vergunst, Floris

  1. By: Ignat Stepanok
    Abstract: I develop a model of endogenous economic growth and search and matching frictions in the labor market. I study the effect of trade liberalization between two identical economies on unemployment. I solve for two versions of the growth model, the first one where trade liberalization has only a temporary effect on growth, a semi-endogenous growth model. In the second version trade liberalization has a permanent effect on growth, a fully endogenous growth model. I show that in both versions trade liberalization has a steady state effect on unemployment that can be either negative or positive depending on parameters
    Keywords: Creative destruction, unemployment, trade liberalization
    JEL: O41 J63 F16
    Date: 2013–01
  2. By: Matthew Jaremski (Department of Economics, Colgate University); Peter Rousseau (Department of Economics, Vanderbilt University)
    Abstract: The “Federalist financial revolution†may have jump-started the U.S. economy into modern growth, but the Free Banking System (1837-1862) did not play a direct role in sustaining it. Despite lowering entry barriers and extending banking into developing regions, we find in county-level data that free banks had little or no effect on growth. The result is not just a symptom of the era, as state-chartered banks seem to have strong and positive effects on manufacturing and urbanization.
    Keywords: Free banking; antebellum banking; financial liberalization; finance-led growth
    JEL: E0 N0
    Date: 2012–12–13
  3. By: Eric Schaling; Mewael F. Tesfaselassie
    Abstract: Available evidence supports the view that growth is faster in more open economies. In order to analyze the implications of openness and growth on determinacy and learnability of worldwide rational expectations equilibria we develop a two-country New Keynesian model with growth. We analyze these issues for contemporaneous data and expectations-based monetary policy rules. Our results highlight how growth matters for the overall effect of opening an economy to more trade, as we find that (i) under the contemporaneous data policy rule the conditions for determinacy and learnability become more stringent on account of openness but less stringent on account of growth, so that growth weakens the effect of openness, (ii) under the expectations-based policy rule the conditions for determinacy and learnability also become more stringent on account of openness while on account growth the conditions for determinacy become \emph{more} stringent (thus reinforcing the effect of openness) but those for learnability become \emph{less} stringent (thus weakening the effect of openness). As in \citet{BS09} the elasticity of intertemporal substitution is key to our result but within a framework that is consistent with long-run labor supply and balanced growth facts
    Keywords: trend growth,open economy,monetary policy rules,determinacy,learning
    JEL: E58 E61 F31 F41
    Date: 2013–01
  4. By: Delgado, Michael S. (Purdue University); Henderson, Daniel J. (University of Alabama); Parmeter, Christopher F. (University of Miami)
    Abstract: Empirical growth regressions typically include mean years of schooling as a proxy for human capital. However, empirical research often finds that the sign and significance of schooling depends on the sample of observations or the specification of the model. We use a nonparametric local-linear regression estimator and a nonparametric variable relevance test to conduct a rigorous and systematic search for significance of mean years of schooling by examining five of the most comprehensive schooling databases. Contrary to a few recent papers that have identified significant nonlinearities between education and growth, our results suggest that mean years of schooling is not a statistically relevant variable in growth regressions. However, we do find evidence (within a cross-sectional framework), that educational achievement, measured by mean test scores, may provide a more reliable measure of human capital than mean years of schooling.
    Keywords: mean years of schooling, human capital, irrelevant variables, significance testing, nonparametric
    JEL: C14 J24 I20 O10 O40
    Date: 2012–12
  5. By: : Daniel J. Henderson (Department of Economics, Finance and Legal Studies, University of Alabama); Chris Papageorgiou (Strategy, Policy and Review Department, International Monetary Fund, Washington, DC); Christopher F. Parmeter (Department of Economics, University of Miami)
    Abstract: This paper takes a fresh look at the impact of financial development on economic growth by using recently developed kernel methods that allow for heterogeneity in partial effects, nonlinearities, and endogenous regressors. Our results suggest that while the positive impact of financial development on growth has increased over time, it is also highly nonlinear with more developed nations benefiting while low-income countries do not benefit at all. We also conduct a novel policy analysis that confirms these statistical findings. In sum, this set of results contributes to the ongoing policy debate as to whether low-income nations should scale up financial reforms.
    Keywords: Country heterogeneity, financial development, growth, nonlinearities, nonparametric regression, irrelevant variables
    JEL: C14 O16 O47
    Date: 2012–10–15
  6. By: Veenhoven, Ruut; Vergunst, Floris
    Abstract: The 'Easterlin Paradox' holds that economic growth in nations does not buy greater happiness for the average citizen. This thesis was advanced in the 1970s on the basis of the then available data on happiness in nations. Later data have disproved most of the empirical claims behind the thesis, but Easterlin still maintains that there is no long-term correlation between economic growth and happiness. This last claim was tested using the time trend data available in the World Database of Happiness, which involve 1531 data points in 67 nations that yield 199 time-series ranging from 10 to more than 40 years. The analysis reveals a positive correlation between GDP growth and rise of in happiness in nations. Both GDP and happiness have gone up in most nations, and average happiness has risen more in nations where the economy has grown the most; r =+0.21 p< 05. On average a 1% growth in income per capita per year was followed by a rise in average happiness on scale 0-10 of 0.00335; thus a gain in happiness of a full point would take 60 years with an annual economic growth of 5%.
    Keywords: happiness; economic growth; Easterlin Paradox; trend analysis
    JEL: O10 I31 Z10 D60 A10 H00
    Date: 2013–01–23

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