nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2013‒06‒24
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Optimal Capital Taxation in A Neoclassical Growth Model By Chia-Hui Lu; Been-Lon Chen
  2. Economic Growth and Human Development; A Link Mechanism: An Empirical Approach By Bundala, Ntogwa
  3. China’s Savings Multiplier By Halvor Mehlum; Ragnar Torvik; Simone Valente
  4. The growth effects on degrowth: what remains of the center-periphery model? By Issaoui, Fakhri; Boufateh, Talel; Guesmi, Mourad
  5. State dependence in the finance-growth nexus: A functional coefficient approach By Herwartz, Helmut; Walle, Yabibal M.
  6. Systematic consumption risk in currency returns By Mathias Hoffmann; Rahel Suter
  7. Endogenous Growth and Property Rights over Renewable Resources By Nujin Suphaphiphat; Pietro F. Peretto; Simone Valente
  8. R&D, innovation and knowledge spillovers: An empirical reappraisal based on cross sectional dependence By Anna Bottasso; Carolina Castagnetti; Maurizio Conti
  9. Does “Crowd Out” Offset The Stimulus Effect Of Government Deficits? A Large Scale Econometric Study By John J. Heim
  10. Does globalization matter on fiscal decentralization of OECD? By Barbara ERMINI; Raffaella SANTOLINI
  11. Informal or Formal Financing? Or Both? First Evidence on the Co-Funding of Chinese Firms By Degryse, H.A.; Lu, L.; Ongena, S.
  12. From Smith to Schumpeter: A Theory of Take-Off and Convergence to Sustained Growth By Pietro F. Peretto

  1. By: Chia-Hui Lu (Department of Economics, National Taipei University); Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: This paper studies the optimal factor tax incidence in a neoclassical growth model with a given share of government expenditure in output. In the Ramsey planner’s optimization, the effect of next period’s capital on government expenditure equals the given share of the marginal product of capital. Capital accumulation reduces the discounted net marginal product of next period’s capital by way of increasing government expenditure. In order to internalize the distortion, it is optimal to tax capital income in the long run.
    Keywords: Optimal factor taxation, efficiency
    JEL: D83 E62 H21 J64
    Date: 2013–05
  2. By: Bundala, Ntogwa
    Abstract: The aim of the study was to determine the relationship mechanisms between the economic growth and human development. The research used cross country survey research design. The research covers 40 countries, 10 countries from each of human development ranks. Multivariate multiple regression model is used to analyse data. The research found that there is a strong relationship between economic growth and human development. But the relationship is not perfect it starts after a country attained a certain level of human development. It is recommended that a country should concentrate on both improving human development and the economic growth since are strongly related, the human development is an important input to growth economic and in turns, the economic growth activates the human development. The political policies and technology invested have a positive influence on the human development and economic growth in a particular country
    Keywords: Economic growth, human development
    JEL: O11 O15 O47
    Date: 2012–08
  3. By: Halvor Mehlum; Ragnar Torvik; Simone Valente
    Abstract: China’s growth is characterized by massive capital accumulation, made possible by high and increasing domestic savings. In this paper we develop a model with the aim of explaining why savings rates have been high and increasing,and we investigate the general equilibrium effects on capital accumulation and growth. We show that increased savings and capital accumulation stimulates further savings and capital accumulation, through an intergenerational distribution effect and an old-age requirement effect. We introduce what we term the savings multiplier, and we discuss why and how the one-child policy, and the dismantling of the cradle-to-grave social bene?ts provided through the state owned enterprises, have stimulated savings and capital accumulation.
    Keywords: China, One-child policy, Overlapping generations, Growth, Savings
    JEL: O11 D91 E21
    Date: 2013–06
  4. By: Issaoui, Fakhri; Boufateh, Talel; Guesmi, Mourad
    Abstract: Although economic growth is considered one of topics the most discussed and studied by economists, some questions are hitherto unexplored. In this article we will try to address one of these issues by studying the effect of growth shocks of hegemonic countries on the growth of peripheral countries. By using a structural VAR model, we have shown that the peripheral countries integration in trade relations with the center countries, although it may allow the growth of short and medium term, it prevents them, to confirm their long-term economic independence.
    Keywords: Growth, Center-Periphery, Development
    JEL: E61 O4 P2
    Date: 2013–06–18
  5. By: Herwartz, Helmut; Walle, Yabibal M.
    Abstract: Noting that 'one size does not fit all' in the case of the finance-growth (FG) nexus, a growing body of literature has recently focused on uncovering economic conditions under which financial development could be beneficial (detrimental) to economic development. We look into these conditions by means of a flexible semiparametric approach which allows the long-run FG nexus to depend on measurable economic states. Using annual data for 74 economies spanning the period 1975-2005, we find that the level of financial development shows a strong positive impact on the FG nexus. Moreover, although the impact of finance on growth is generally higher in high-income economies, allowing for intra-group variations reveals scenarios where the impact could be higher in low-income economies. However, the FG link could also be negative if low- and lower-middle-income economies have very large governments or are extremely open to international trade. --
    Keywords: finance-growth nexus,financial development,economic growth,functional coefficient model
    JEL: C14 C33 O16 G28
    Date: 2013
  6. By: Mathias Hoffmann; Rahel Suter
    Abstract: We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return—our consumption carry factor—prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.
    Keywords: Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model
    JEL: E44 F31 F44 G12 G15
    Date: 2013–06
  7. By: Nujin Suphaphiphat; Pietro F. Peretto; Simone Valente
    Abstract: We analyze the general-equilibrium effects of alternative regimes of access rights over renewable natural resources – namely, open access versus full property rights on the pace of development when economic growth is endogenously driven by both horizontal and vertical innovations. Resource exhaustion may occur under both regimes but is more likely to arise under open access. Under full property rights, positive resource rents increase expenditures and temporarily accelerate productivity growth, but also yield a higher resource price at least in the short-to-medium run. We characterize analytically the welfare effect of a regime switch induced by a failure in property rights enforcement: switching to open access is welfare reducing if the utility gain generated by the initial drop in the resource price is more than offset by the static and dynamic losses induced by reduced expenditure.
    Keywords: Endogenous growth, Innovation, Renewable Resources, Sustainable Development, Property Rights
    JEL: O11 O31 Q21
    Date: 2013
  8. By: Anna Bottasso (Department of Economics, University of Genoa); Carolina Castagnetti (Department of Economics and Management, University of Pavia); Maurizio Conti (Department of Economics, University of Genoa)
    Abstract: Bottazzi and Peri (2007) show that the existence of a cointegrating relationship between the domestic stock of knowledge, domestic R&D and the international knowledge stock can be interpreted as evidence supporting the semi-endogenous growth models versus the endogenous growth ones. We replicate their study in a wide sense by analysing a slighlty wider sample of countries observed over a more recent time period and by estimating the cointegrating vector with an econometric methodology that is robust to cross sectional dependence. Our replication confirms Bottazzi and Peri’s main results but finds stronger spillover effects.
    Date: 2013–06
  9. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: This large scale econometric study finds private borrowing and spending decline as government deficits grow, due to “crowd out” effect resulting from financing the deficits from the limited pool of available loanable funds, and crowd out completely offsets stimulus effects. This result is found even controlling for business cycle effects, which can cause the same negatively correlated behavior. Separate tests of different types of tax cuts and government spending programs yielded the same result, as did tests of recession versus nonrecession periods. The models, tested on 50 years of data, explain very well the behavior of consumption and investment during the 2007-09 economic crisis, and simulation suggests that, ceteris paribus, stimulus programs of the type and composition of the 2009 Obama stimulus program would have a substantial negative effect on the economy, raising unemployment 1.25% -2.25% during the period they were in force. Negative effects of crowd out on consumer and business borrowing were also found, consistent with the spending findings. This supporting the underlying theory of crowd out, which is that reduced private borrowing (due to crowd out) is responsible for the observed negative relationship between private spending and deficit growth. Several hypotheses proposed by Krugman and others to refute the notion of crowd out negates the stimulus effects of deficits are tested. None are supported by the data. Hypotheses by Gale and Orszag that government transfer spending and federal tax cuts have positive stimulus effects, though others types might not, are tested. The hypotheses are not supported by the data. Well defined structural models of the U. S. economy 1960-2010 are tested. Extensive tests for endogeneity, stationarity, heteroskedasticity, as well as tests for robustness over time, with respect to model specification, and with respect to econometric technique were undertaken. Testing was done in 1st differences, eliminating most nonstationarity and reducing multicollinearity by approximately half. Models explained 90 -95% of the yearly changes of consumption and Investment during the 50 year period. Results were robust for tests of different time periods, generally fitting the data as well for the 1950s and 60s as for the 2000-10 period, and periods in between. Results were also robust for moderate changes to structural models, different regression techniques (OLS, strong and weak instrument 2SLS), and use of different strong 2SLS instruments.
    JEL: C50 C51 E12 E21 E22
    Date: 2013–06
  10. By: Barbara ERMINI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Raffaella SANTOLINI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: In this paper we re-examine the effects of globalization on fiscal decentralization of OECD by using the overall KOF index of globalization and its main subcomponents - economic, political and social integration. Using different indicators of fiscal decentralization, we find a positive impact of the overall index of globalization on both revenue and expenditure decentralization side, although not robust across different panel data specifications. Focusing on the links between decentralization and different aspects of globalization, we find that both economic and social integration foster fiscal decentralization, whereas political integration checks growth of it.
    Keywords: Economic integration, Fiscal decentralization, Globalization, Panel data analysis, Political integration, Social integration
    JEL: F15 F5 H7 H87
    Date: 2013–06
  11. By: Degryse, H.A.; Lu, L.; Ongena, S. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: The recent financial crisis has reopened the debate on the impact of informal and formal finance on firm growth in developing countries. Using unique survey data, we find that informal finance is associated with higher sales growth for small firms and lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Informal finance offers informational and monitoring advantages, while formal finance offers relatively inexpensive funds. Co-funding, i.e. the simultaneous use of formal and informal finance, is the optimal choice for small firms.
    Keywords: Informal Finance;Formal Finance;Co-Funding;Growth.
    JEL: G21 G32 P2
    Date: 2013
  12. By: Pietro F. Peretto
    Abstract: This paper develops a theory of the emergence of modern innovation-driven Schumpeterian growth. It uses a tractable model that yields a closed-form solution, consisting of an S-shaped (i.e., logistic-like) time path of firm size and a set of equations that express the relevant endogenous variables – GDP, product variety and product quality, consumption, the shares of GDP earned by the factors of production – as functions of firm size. It also obtains closed-form solutions for the dates of the events that drive the economy's phase transitions as functions of the fundamentals. The resulting path of GDP per capita consists of a convex-concave profile replicating the key feature of long-run data: an accelerating phase followed by a deceleration with convergence to a stationary growth rate. Compared to other availables theories, the paper focuses on the within-industry forces that regulate the response of …firms and entrepreneurs to Smithian market expansion.
    Keywords: Endogenous Growth, Firm Size, Market Structure, Take-off
    JEL: E10 L16 O31 O40
    Date: 2013

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