nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2013‒04‒13
sixteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Political rivalry effects on human capital accumulation and inequality: a New Political Economy approach By Elena Sochirca; Oscar Afonso; Sandra Silva
  2. Regime Change, Democracy and Growth By Freund, Caroline; Jaud, Melise
  3. The Causal Relationship between House Prices and Economic Growth in the Nine Provinces of South Africa: Evidence from Panel-Granger Causality Tests By Tsangyao Chang; Beatrice D. Simo-Kengne; Rangan Gupta
  4. External Constraints and Endogenous Growth: Why Didn’t Some Countries Benefit From Capital Flows? By Karine Gente; Miguel A. León-Ledesma; Carine Nourry
  5. Short-Run Pain, Long-Run Gain : the Conditional Welfare Gains from International Financial Integration By Raouf Boucekkine; Giorgio Fabbri; Patrick A. Pintus
  6. Consumption Growth, the Interest Rate, and Financial Literacy By Jappelli, Tullio; Padula, Mario
  7. Optimal growth policy: The role of skill heterogeneity By Grossmann, Volker; Steger, Thomas M.
  8. Skill Structure and Technology Structure: Innovation and Growth Implications By Pedro Mazeda Gil; Oscar Afonso; Paulo Brito
  9. The Outcome of Directed Lending in Belarus: Mitigating Recession or Dampening Long-Run Growth? By Kruk Dzmitry; Haiduk Kiryl
  10. Remittances and Economic Growth in Mexico: An Empirical Study with Structural Breaks. By Miguel Ramirez
  11. Can the Method of Reflections help predict future growth? By Guzmán OURENS
  12. It’s the Debt-Growth Nexus Again – Evidence from a Long Panel of Regional-Government Liabilities By Timo Mitze; Florian Matz
  13. International spillovers in a world of technology clubs By Roman Stöllinger
  14. Using surveys of business perceptions as a guide to growth-enhancing fiscal reforms By Misch, Florian; Gemmell, Norman; Kneller, Richard
  15. Productivity Growth and Convergence: Portugal in the EU 1986-2009 By Adelaide Duarte; Marta Simões; João Sousa Andrade
  16. Export-led growth in Europe: Where and what to export? By Paula Gracinda Santos; Ana Paula Ribeiro; Vitor Manuel Carvalho

  1. By: Elena Sochirca (FEP); Oscar Afonso (FEP); Sandra Silva (FEP)
    Abstract: Abstract We propose an endogenous growth model with elements of new political economy in order to study the effects of political institutions and political rivalry on human capital accumulation and income inequality. Relating to the increasing literature on the relationship between income redistribution, inequality and growth, and on the political economy of growth, our model shows that (i) non-distortionary redistribution via public education equalizes income levels and increases human capital accumulation; (ii) political rivalry produces negative outcomes in all dimensions of the considered economic interactions. In particular, we find that occurring episodes of political rivalry reduce human capital accumulation through their negative impact on public investments in education, workers' wages and individual learning choice, and increase income inequality. As regards the role of political institutions, our analysis suggests that the elasticities of human capital accumulation with respect to public and private investments have crucial implications for public policies and require particular attention to the political rivalry effects.
    Keywords: political rivalry, institutions, human capital accumulation, public education, inequality, efficient redistribution, economic growth.
    JEL: H21 H40 H52 E24
    Date: 2012–09
  2. By: Freund, Caroline; Jaud, Melise
    Abstract: Theory and empirics are ambiguous on the effect of democracy on growth. Cross-country studies find that democracy has no significant impact on growth. In contrast, within-country studies find a strong positive effect of transition to democracy. We reconcile this inconsistency by showing that the positive effect of political transition is a result of swift regime change and not democratization. We identify and examine 90 successful, failed, and gradual transitions that have occurred over the last half century. This new classification permits us to compare successful episodes of democratization with unsuccessful ones -- as opposed to with the counterfactual of no transition. We find that both successful and failed transitions boost long-run growth by about one percentage point, but gradual change is quite costly in economic terms. The results imply that the growth dividend from political transition is a result of regime change and not democratization, and also offer new evidence on the importance of the speed of transition for economic growth. The results are robust to a number of alternative specifications, to stricter and more lenient definitions of democratic transition, and to including reverse transitions.
    Keywords: democratization; event study; political transition
    JEL: N40 O43
    Date: 2013–01
  3. By: Tsangyao Chang (Department of Finance, Feng Chia University, Taichung, Taiwan); Beatrice D. Simo-Kengne (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper analyses the causal relationship between housing activity and growth in nine provinces of South Africa for the period 1995-2011, using panel causality analysis, which accounts for cross-section dependency and heterogeneity across provinces. Our empirical results support unidirectional causality running from housing activity to economic growth for most of the provinces studied; bi-directional causality between housing activity and economic growth for Gauteng; and no causality in any direction between housing activity to economic growth in Eastern Cape and KwaZulu-Natal. Our findings provide important insights for housing policies and strategies for South Africa. Specifically, housing sector might be an efficient growth-led instrument for all the provinces except Eastern Cape and KwaZulu-Natal.
    Keywords: House Prices, Economic Growth, Dependency and Heterogeneity, Panel Causality Test
    JEL: C33 R11 R12 R31
    Date: 2013–04
  4. By: Karine Gente; Miguel A. León-Ledesma; Carine Nourry
    Abstract: Empirical evidence on the growth benefits of capital inflows is mixed. The growth benefits accruing from capital inflows also appear to be larger for high savings countries. We explain this phenomenon using an OLG model of endogenous growth in open economies with borrowing constraints that can generate both positive and negative growth effects of capital inflows. The amount an economy can borrow is restricted by an endogenous enforcement constraint. In our setting, with physical capital and a pay-as-you-go pensions system, the steady state is unique. However, it can either be constrained or unconstrained. In a constrained economy, opening up to equity and FDI inflows can be bad for growth because it makes the domestic interest rate too low, which endogenously tightens borrowing constraints. Agents decrease savings and investment in productivity-enhancing activities resulting in lower growth. Results are reversed in an unconstrained economy. We also provide a quantitative analysis of these constraints and some policy implications.
    Keywords: overlapping generations; endogenous credit constraint; capital flows; endogenous growth
    JEL: F43 F34
    Date: 2013–03
  5. By: Raouf Boucekkine (Aix-Marseille University (Aix-Marseille School of Economics)); Giorgio Fabbri (EPEE, Université d’Evry-Val-d’Essonne (TEPP, FR-CNRS 3126)); Patrick A. Pintus (Aix-Marseille University (Aix-Marseille School of Economics), Institut Universitaire de France)
    Abstract: This paper aims at clarifying the conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on the capital-deepening effect of financial globalization in an open-economy AK model and we show that collateral-constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth - long-run gain - are shown to be robust to relaxing the assumption of investment commitment, which generates growth breaks and hampers welfare. For reasonable parameter values and relative to autarky, welfare gains range from about 2% in middle-income countries to about 13% in OECD-type countries under international Financial integration. Sizeable benefits emerge despite the fact that consumption falls when the economy switches from autarky to financial integration - short-run pain - which is however shown not to dwarf positive welfare changes.
    Keywords: International Financial Integration, Collateral-Constrained Borrowing, Welfare Gains, Growth Breaks, Leapfrogging
    JEL: F34 F43 O40
    Date: 2012–11
  6. By: Jappelli, Tullio; Padula, Mario
    Abstract: We study a model in which financial sophistication improves portfolio returns and therefore the incentive to substitute consumption intertemporally. The model delivers a Euler equation in which consumption growth is positively correlated with financial sophistication. We test the model's prediction using panel data on consumption and financial literacy from the Italian Survey of Household Income and Wealth (SHIW) and an appropriate instrumental variables procedure. We find that consumption growth is positively correlated with financial literacy. Under plausible assumptions, we provide estimates of the intertemporal elasticity of substitution that are in line with those in the literature (between 0.2 and 0.4). We complement our results with direct evidence on the link between financial literacy and return on saving.
    Keywords: consumption growth; Euler equation; financial literacy
    JEL: D8 E2 G1 J24
    Date: 2013–03
  7. By: Grossmann, Volker; Steger, Thomas M.
    Abstract: A simple semi-endogenous growth model is employed to show that optimal subsidization of both R&D and capital costs is independent of the distribution of R&D skills in the workforce. This holds despite the empirically supported fact that a higher R&D subsidy rate raises wages of R&D workers. --
    Keywords: Optimal growth policy,R&D skills,R&D subsidy,Semi-endogenous growth,Heterogeneity
    JEL: O30 O40 H20
    Date: 2012
  8. By: Pedro Mazeda Gil (Faculdade de Economia, Universidade do Porto); Oscar Afonso (Faculdade de Economia, Universidade do Porto); Paulo Brito (ISEG, Universidade Técnica de Lisboa)
    Abstract: This paper builds an endogenous growth model of directed technical change with vertical and horizontal R&D and scale effects at the industry level to study an analytical mechanism that is consistent with the observed cross-country pattern in the skill structure, the technology structure and economic growth. We calibrate the model in order to uncover the effect of the skill structure on economic growth by studying how the former affects the technology structure. We find that the small positive elasticity of the economic growth rate regarding the ratio of high- to low-skilled workers that is empirically observed is explained by the combination of moderate levels of the market complexity costs related to vertical R&D and high entry costs in the high- vis-à-vis the low-tech sectors, which dampen the positive direct effect of the absolute productivity advantage of the high-skilled workers on growth
    Keywords: high-tech, low-tech, scale effects, skills, directed technical change
    JEL: O41 O31
    Date: 2012–09
  9. By: Kruk Dzmitry; Haiduk Kiryl
    Abstract: This study analyzes the effects of directed lending upon total factor productivity and GDP growth in Belarus over the period of 2000–2012. In theory, directed lending can enhance physical capital accumulation and make the access to credit easier, but empirical studies often show that it leads to unproductive hoarding of capital and financing of lower-yielding projects. This study seeks to explore which of these effects has dominated in the Belarusian economy during a last decade. We find that expansion of directed lending has negatively affected TFP dynamics and thus negatively contributed to the rates of economic growth. . However, the detected negative impact of directed lending on total factor productivity was enfeebled by the expansion of market loans. In the future, this link between directed and market loans could cease to exit due to liquidity constrained commercial banks face. If continued, directed lending may cause a more severe negative impact on TFP, and consequently undermine long-run economic growth.
    JEL: C32 O16 P34
    Date: 2013–02–04
  10. By: Miguel Ramirez (Department of Economics, Trinity College)
    Abstract: This paper investigates remittance flows to Mexico during the 1980-2010 period in absolute terms, relative to GDP, in comparison to FDI inflows, and in terms of their regional destination. Next, the paper reviews the growing literature that assesses the impact of remittances on investment spending and economic growth. Third, it presents a simple endogenous growth model that explicitly incorporates the potential impact of remittance flows on economic and labor productivity growth. Fourth, it presents a modified empirical counterpart to the simple model that tests for both single- and two-break unit root tests, as well as performs cointegration tests with an endogenously determined level shift over the 1970-2010 period. The error-correction model estimates suggest that remittance flows to Mexico have a positive and significant effect, albeit small, on both economic growth and labor productivity growth. The concluding section summarizes the major results and discusses potential avenues for future research on this important topic.
    Keywords: Error-correction model, FDI inflows, Gregory-Hansen cointegration single-break test, Gross fixed capital formation, Johansen Cointegration test, KPSS no unit root test, Lee-Strazicich two-break unit root test, remittance flows, and Zivot-Andrews single-break unit root test
    JEL: C22 F24 O4 O15 O54
    Date: 2013–03
  11. By: Guzmán OURENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Universidad de la Republica (Uruguay) - ECON)
    Abstract: Building upon an original and fruitful research line, a recent paper by Hidalgo and Hausmann (2009) proposed new indicators of product sophistication and economic complexity constructed solely upon international trade data, in their Method of Reflections. The authors find their indicators for economic complexity to be highly related to countries' income and show evidence supporting their use as predictors of future growth in the short and long run. This would make these indicators very appealing to empirical economists and policy-makers. This work tests these properties for the indicators constructing them upon a more disaggregated database and changing some other important methodological decisions. Results show that MR indicators are strongly related to income and they can be considered good predictors of long-term growth under certain conditions. Evidence supporting MR indicators as good predictors of short-term growth could not be found.
    Keywords: Method of reflections, specialization, growth, economic complexity
    JEL: O47 O33 F14
    Date: 2013–03–26
  12. By: Timo Mitze; Florian Matz
    Abstract: In this paper, we study the long- and short-run relationship between regional public debt and economic performance for a sample of German federal states over the period of four decades (1970-2010). By choosing a sample of regional entities with comparable institutional settings, we complement the large literature on the debt-growth nexus based on heterogeneous cross-country samples. We estimate a dynamic error correction model that accounts for slope heterogeneity among cross-sections and the presence of unobserved common factors. While – in line with the Keynesian view – our findings hint at a non-linear inverted U-shape relationship between changes in the public debt intensity and economic growth in the short-run, we get strong statistical evidence for linear negative relationship between regional public depth and per capita GDP in the long-run. By means of a simple though experiment, we show that these negative long-run effects are not negligible for the size of interregional differences in per capita GDP levels and are in line with most international evidence on the detrimental growth effects of high public debt levels. Finally, these results also underline the need for effective fiscal rules at the federal state level in Germany.
    Keywords: Government debt; economic growth; German states; panel data; unobserved common factors
    JEL: C23 R11 R50 E62
    Date: 2013–03
  13. By: Roman Stöllinger
    Abstract: Technology is a key element for long-term growth and economic development. Given the stark concentration of innovation activities in a few countries most countries have to rely on the international diffusion of newly developed technologies. Some countries may fail to successfully perform the task of technology adaption leading to a tripartite segmentation of countries into an innovation club, an imitation club whose members are capable of absorbing technologies developed by the former and a stagnation group that lack the capability to absorb foreign technologies. We test the role of the technology gap for growth as suggested by the technology club hypothesis in a threshold regression framework using human capital as the threshold variable. Using this approach, which is related to Benhabib-Spiegel type growth regressions, we are able to identify two distinct thresholds giving rise to three country groupings. As suggested by the theory of technology clubs we find the strongest effects from the catch-up term on economic growth for the intermediate group (imitation club).
    Keywords: technology clubs, threshold regressions, technology spillovers, Schumpeterian growth model, human capital
    JEL: O47 O41 I25 O33
    Date: 2013–03
  14. By: Misch, Florian; Gemmell, Norman; Kneller, Richard
    Abstract: This paper assesses the merits of using surveys of business perceptions of growth constraints as a guide to growth-enhancing fiscal policy reforms. Using endogenous growth models in which the government levies an income tax to provide public inputs to the production of private firms, the paper demonstrates that business perceptions of growth constraints are subject to systematic biases except when firms compare different types of public services or different types of public capital. In particular firms can be expected to systematically over-estimate the growth-enhancing effects of lower tax rates, and under-estimate the growth-enhancing effects of greater provision of public capital. It is then shown that these theoretical predictions regarding how firms rank constraints correspond closely to the observed ranking of constraints by firms in the World Bank's Enterprise Surveys. --
    Keywords: Economic Growth,Fiscal Policy,Imperfectly Informed Governments,Business Perceptions,Diagnostics,Subjective Data
    JEL: D20 E62 O12
    Date: 2013
  15. By: Adelaide Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal); Marta Simões (Faculty of Economics, University of Coimbra and GEMF, Portugal); João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: The Portuguese growth and convergence experience after EU membership can be divided into two periods: 1986-1998, a convergence period during which growth in the Portuguese economy accelerated and Portugal grew faster than the EU14 average; and a stagnation/divergence period from 1999 onwards when its growth rate slowed down to figures lower than the reference group average. Differences among developed countries in terms of output levels and growth are mainly explained by differences in productivity, with Portugal falling behind relative to the EU14 in recent years as far as the former are concerned. In order to better understand the causes for the changes in the growth and convergence rhythm of the Portuguese economy after EU accession this paper analyses productivity growth in a panel of 14 European Union countries over the period 1986-2009. We estimate an empirical model where innovation and imitation provide two potential sources of productivity growth for countries behind the technological frontier, as is the case of Portugal, and those activities are in turn influenced by absorptive capacity and structural and institutional characteristics as well as capital accumulation. The results from the estimation of TFP growth regressions with quantile regression techniques reveal that, for lower rates of productivity growth, an increase of the non-tradables sector share is especially harmful, while the positive influence from technological backwardness and innovation activities are felt less strongly, while the positive influence from capital accumulation is felt more strongly. These results raise strong concerns concerning Portugal’s future growth prospects given its current specialization pattern towards traditional personal services and the country’s still considerable distance from the technological frontier and relatively low innovative intensity.
    Keywords: productivity growth, innovation, imitation, Portugal, EU.
    JEL: C23 O47 O52
    Date: 2013–02
  16. By: Paula Gracinda Santos (Faculdade de Economia, University of Porto); Ana Paula Ribeiro (Faculdade de Economia, University of Porto, and CEF.UP – Center for Economics and Finance at UP); Vitor Manuel Carvalho (Faculdade de Economia, University of Porto, and CEF.UP – Center for Economics and Finance at UP)
    Abstract: From the late 70s onwards, the literature has produced numerous studies, mostly for developing countries, relating exports and economic growth. Since several European Union (EU) countries face strong recessions in the sequence of the economic crisis and the related fiscal consolidation measures, exports emerge as a meaningful source of growth for developed countries with rather stagnant domestic markets. In this context, we assess if and how the product and the destination structures of exports shape the growth dynamics for the EU countries. Using panel data estimation to 23 of the 27 EU members over the period 1995-2010, we find that economic growth is foster through export specialization in high value-added products, such as manufactures and high-technology. Moreover, we find evidence that higher growth is fostered by export diversification across partners while enlarging the portfolio of partners, mainly to less developed and more distant countries, has negative impacts on European growth. Unambiguously, relative concentration of exports should be directed towards higher growth countries.
    Keywords: Economic growth; Product structure of exports; Exports’ destination; European Union; Panel data.
    JEL: C23 F10 O40 O52
    Date: 2013–01

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