nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2013‒12‒15
seven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Does sovereign debt weaken economic growth? A Panel VAR analysis. By Lof, Matthijs; Malinen, Tuomas
  2. Bank performance and economic growth: evidence from Granger panel causality estimations By Cândida Ferreira
  3. Foreign Direct Investment, Human Capital and Economic Growth in Malaysia By Gulam Hassan, Mohamed Aslam; Abou Sakar, Sameer
  4. Does Health Accelerate Economic Growth in Pakistan? By Naeem Ur Rehman, Khattak; Jangraiz, Khan
  5. Trade Openness, Institutional Change and Economic Growth By Antonio Navas
  6. Public Debt and Economic Growth in Sri Lanka: Is There Any Threshold Level for Pubic Debt? By Hemantha Kumara; Nawalage S. Cooray
  7. Inflation and Economic Growth in Zambia: A Threshold Autoregressive (TAR) Econometric Approach By Phiri, Andrew

  1. By: Lof, Matthijs; Malinen, Tuomas
    Abstract: We estimate a panel vector autoregressive model to analyze the highly disputed relationship between debt and growth. Using data on 20 developed countries, we find no evidence for a robust effect on debt to growth, even for higher levels of sovereign debt. We do find a significant negative reverse effect of growth to debt, which explains the negative correlation.
    Keywords: Public debt, debt share, GDP growth
    JEL: C33 H63 O43
    Date: 2013–10
  2. By: Cândida Ferreira
    Abstract: This paper provides empirical evidence on the causality relations between bank performance and economic growth in a panel including 27 European Union member-states from 1996 through to the onset of the 2008 financial crisis. Bank performance is represented not only by the Return on Assets (ROA) and Return on Equity (ROE) ratios but also by bank cost efficiency, measured through Data Envelopment Analysis (DEA). For economic growth, we consider not only the GDP per capita but also the gross fixed capital formation growth. Deploying a panel Granger causality approach, we confirm positive causality running from bank performance to economic growth. However, as regards the opposite causality, running from growth to bank performance, we conclude that economic growth positively contributes to the bank ROA and ROE ratios but not so certainly in the case of the DEA bank cost efficiency.
    Keywords: Bank performance, Economic growth, DEA, Panel Granger causality, European Union.
    JEL: G21 G31 E44 F43 F36
    Date: 2013–12
  3. By: Gulam Hassan, Mohamed Aslam; Abou Sakar, Sameer
    Abstract: The international markets have been the major influence spurring economic growth and development in the Malaysian economy even until today. There were two sources of growth, namely foreign capital and exports of commodities. The government particularly beginning in 1971 moved to develop human capital stock by investing a large amount of public capital in the education sector. However, the growth of human capital did not become a significant catalyst for economic growth. Public and private expenditures for research and development (R&D) remained low compared to neighboring countries such as South Korea and Singapore. This paper examines the effects of Foreign Direct Investment (FDI) and Human Capital (HC) development on economic growth in Malaysia. This paper will also discuss the contribution of these two factors to Malaysia’s economic growth for the period of 1980 - 2010 from three angles: Gross Domestic Products (GDP) growth, GDP per capita growth and technological change.
    Keywords: Economic growth, Human Capital, Foreign Direct Investment, Education, Malaysia.
    JEL: O4 O47 O5 O53
    Date: 2013–11–23
  4. By: Naeem Ur Rehman, Khattak; Jangraiz, Khan
    Abstract: This paper has been designed to investigate whether health accelerate economic growth in Pakistan. The study is using Growth Accounting Method, Ordinary Least Squares and Johansen Cointegration Test as analytical techniques. The Growth Accounting Method shows that Total Factor Productivity, Capital and health contributed 46.61%, 43.15% and 2.61% to growth rate of GDP per capita during 1971-2008. The Ordinary Least Squares results showed health, labour and Research and Development as the significant determinants of economic growth in Pakistan. The results further indicate that real GDP per capita, R&D, education and health institutions affect heath in Pakistan. The Cointegration test results confirmed the existence of long run relation ship between health and economic growth. Therefore, the study concludes that health accelerates economic growth in Pakistan and this relationship also exists in long run. The study suggests increase in public expenditure on health and R&D. It is also suggests further research on the determinants of Total Factor Productivity
    Keywords: Health, Economic Growth, Growth Accounting, Ordinary Least Squares, Pakistan
    JEL: O15
    Date: 2012
  5. By: Antonio Navas (Department of Economics, The University of Sheffield)
    Abstract: This paper creates a theory of endogenous growth with endogenous institutional change to analyse the impact that trade openness has on economic growth through a change in institutions in pre-industrial societies. An elite (landowners) controlling the political power expropriates another social group (capitalists). This reduces investment in physical capital, the source of endogenous growth. The rival group (capitalists) can take a military action to expel the group in power. I study optimal expropriation, growth and institutional change under two scenarios, autarky and free trade. The simulation results suggest that for a vast majority of cases economies open to trade generally experience higher growth and earlier institutional change. This is the consequence of the fact that the elite reduces the expropriation rate when the economy opens up to trade. In addition, economies specialising in manufacturing products tend to grow more and introduce institutional change earlier. This is consistent with the divergent pattern in growth and institutions that Western European Economies were experiencing during the modern era and the industrial revolution.
    Keywords: trade; institutions; growth in the very long run
    JEL: F43 O43
    Date: 2013
  6. By: Hemantha Kumara (International University of University); Nawalage S. Cooray (International University of University)
    Abstract: The nexus between public debt and economic growth is multifaceted. Sri Lanka is not unique to this phenomenon, as there is growing concern about the implications of public debt on economic growth. By the end of 2012, public debt stood at Rs.6 trillion (79.14 percent of GDP). The shares of domestic and external debt to total debt stock were 42.6 and 36.5 per cent of GDP, respectively. In 2012, the total interest paid on public debt was Rs.408.5 billion, which was equal to 5.39 per cent of GDP and 41.35 per cent of the government's total revenue. In addition to large interest payments, there are growing concerns about the huge public debt accumulation and its impact on the economy in the long run. The debt increases economic growth through investment, and it also involves costs because of interest payments. The government aims to reduce the current debt]to]GDP ratio of 79.14 per cent down to 60 per cent by 2016. One can also argue that if the borrowings help increase the growth through high returns, debt accumulation may not be a burden to the economy. The relationship between debt and economic growth in Sri Lanka is inconclusive and has been based on ideological predilections and circumstantial evidence. Although there seems to be an obvious positive linear relationship between debt and growth in Sri Lanka, it is difficult to establish a clear long]run link between the two without a thorough investigation. This study aims to investigate several issues: What is the exact relationship (either positive or negative) between debt and economic growth? If the relationship is nonlinear, what is the optimum or threshold rate of debt that would minimise the economic cost of debt in terms of economic growth? That is, what is the sustainable level of debt for Sri Lanka? Is the Central Bank debt reduction target of 60 per cent by 2016 desirable? The paper develops an econometric model to address these issues based on a conditional convergence using time series data for the period 1960]2010. The study uses two]year non]overlapping averages to capture short]run fluctuations and instrumental variables to address the endogeneity problem. The study finds that there is a nonlinear relationship between the public debt and GDP per capita growth in Sri Lanka. The threshold level for public debt is 59.42 per cent of GDP. Above this level, public debt makes a negative impact on GDP per capita growth. Our finding of a threshold level strongly justify and support the debt reduction target of the government, which aims to reduce the current debt ratio of 79.14 per cent down to 60 per cent by 2016.
    Keywords: Public debt of Sri Lanka, debt and growth, threshold level of debt
    JEL: H63 O40
    Date: 2013–12
  7. By: Phiri, Andrew
    Abstract: This study examines threshold effects of inflation on economic growth for the Zambian economy using quarterly data collected between 1998 and 2011. This objective is tackled through the use of a threshold autoregressive (TAR) model and the conditional least squares (CLS) estimation technique. As a by-product of utilizing this estimation technique, the paper is able to identify whether there could be an optimal inflation level at which the adverse effects of inflation on economic growth are subdued, or similarly, a level of inflation at which the positive effects of inflation on economic growth are maximized. In this respect, the paper estimates an inflation threshold level of 22.5% for the observed data. These results indicate that economic growth in Zambia can be stimulated even in a moderately high inflation environment. Particularly, the causality analysis identifies the credit sector and exchange rate developments as being crucial channels towards ensuring enhanced economic performance in the Zambian economy.
    Keywords: Inflation; Economic Growth; Granger Causality; TAR Models; Zambia
    JEL: C22 E31 E58
    Date: 2013–12–09

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