nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒04‒29
eight papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. A Refinement of the Relationship between Economic Growth and Income Inequality in Developing Countries By Fawaz, Fadi; Rahnamamoghadam, Masha; Valcarcel, Victor
  4. The Lindahl equilibrium in Schumpeterian growth models: Knowledge diffusion, social value of innovations and optimal R&D incentives By Gray, Elie; Grimaud, André
  5. Can general purpose technology theory explain economic growth? Electrical Power as a case study By Cristiano Andrea Ristuccia; Solomos Solomou
  6. The Risks of Fiscal Policy in Countries Rich in Natural Resource By Alexander Knobel
  7. The role of monetary policy in the New Keynesian Model: Evidence from Vietnam By Van Hoang
  8. Causality and contagion in EMU sovereign debt markets By Marta Gómez-Puig; Simón Sosvilla-Rivero

  1. By: Fawaz, Fadi; Rahnamamoghadam, Masha; Valcarcel, Victor
    Abstract: There is mixed evidence in the literature of a clear relationship between income inequality and economic growth. Most of that work has focused almost exclusively on developed economies. In what we believe to be a first effort, our emphasis is solely on developing economics, which we classify as high-income and low-income developing countries (HIDC and LIDC). We make such distinction on theoretical and empirical grounds. Empirically, the World Bank has classified developing economies in this manner since 1978. The data in our sample is also supportive of such classifications. We provide a theoretical scaffolding that uses asymmetric credit constraints as a premise for separating developing economies in such a way. We find strong evidence of a negative relationship between income inequality and economic growth in LIDC to be in stark contrast with a positive inequality-growth relationship for HIDC. Both correlations are statistically significant across multiple econometric specifications. These results are robust to degree of persistence in the variables of interest as well as a measure threshold of income that is estimated endogenously for our sample.
    Keywords: Income inequality, economic growth, Gini coefficient, credit constraints, collateral
    JEL: O1 O10 O40
    Date: 2014–04–08
  2. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Jorge M. Andraz (Faculdade de Economia, Universidade do Algarve)
    Abstract: We estimate the long-term impact of social security and social protection spending in a set of twelve EU countries. We estimate country-specific VARs relating GDP, unemployment, savings, and social spending. We find that social spending has a negative effect in most countries while the effects on savings are either not significant or positive but small. In turn, the negative effects on output are significant and in some cases large. Unemployment is the dominant channel through which social spending affects output. Our results imply that any increase in generosity would, under the current situation, bring detrimental macroeconomic effects. In addition, a less distortionary tax mix should be used to finance redistributive spending and the insurance component of the systems should be changed in the direction of a capitalization regime based on defined contributions. Obviously, this transition would take time and would not be costless but neither is maintaining the status quo.
    Keywords: Social security spending, unemployment, saving, output, fiscal multipliers, VAR, EU.
    JEL: C32 C51 C52 H55
    Date: 2014–04–12
  3. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Jorge M. Andraz (Faculdade de Economia, Universidade do Algarve)
    Abstract: We estimate the long-term impact of changes in social security and social protection spending on economic performance in the USA. We estimate a VAR model relating GDP, unemployment rates, saving rates, and social spending. Our results suggest that social spending has significant distortionary effects in the labor markets as measured by its long term effects on the unemployment rate, which translate into a detrimental effect on long-term output, this despite a positive, albeit small, effect on the gross savings rate. There are important policy implications of these results. If one considers the systems as they are, any further expansion in their generosity would have detrimental long-term effects. These detrimental effects, however, are neither an indictment of social spending or evidence against extension of benefits. What they highlight is the need to carefully consider the financing mechanisms currently used and the need to align benefits and contributions in the pension component of social security and the need to find a taxrevenue mix that is less distortionary for the unfunded benefits.
    Keywords: Social spending, unemployment, saving, output
    JEL: C32 H55
    Date: 2014–04–12
  4. By: Gray, Elie; Grimaud, André
    Abstract: What is the social value of innovations in Schumpeterian growth models? This issue is tackled by introducing the concept of Lindahl equilibrium in a standard endogenous growth model with vertical innovations which is extended by explicitly considering knowledge diffusion. Assuming that knowledge diffuses on a Salop (1979) circle allows us to formalize the creation of the pools of knowledge in which research and development (R&D) activities draw from to produce innovations. Within this model, we compare two equilibria. The standard Schumpeterian equilibrium à la Aghion & Howitt (1992) is mainly characterized by incomplete markets since knowledge is not priced. It provides the usual private value of innovations. The Lindahl equilibrium is a benchmark enabling us to compute the system of prices that sustains the first-best social optimum, and thus to define and to determine analytically the social value of innovations. It provides a suitable methodology for revisiting issues involving the presence of knowledge, often studied in the industrial organization and endogenous growth literatures. This comparison sheds a new light on the consequences of non-rivalry of knowledge and of market incompleteness on innovators’ behavior in the Schumpeterian equilibrium. We notably revisit the issues of Pareto sub-optimality and of R&D incentives in presence of cumulative innovations. Basically, the key externality triggered by market incompleteness implies that knowledge creation is indirectly funded by means of intellectual property rights on rival goods embodying knowledge. Therefore, because the private value of innovations differs from the social one, innovators are not given the optimal incentives.
    Keywords: Schumpeterian growth theory - Lindahl equilibrium - Social value of innovations - Pareto sub-optimality - Cumulative innovations - Knowledge spillovers
    JEL: D52 O31 O33 O40 O41
    Date: 2014–01
  5. By: Cristiano Andrea Ristuccia; Solomos Solomou
    Abstract: Does the concept of General Purpose Technologies help explain periods of faster and slower productivity advance in economies? The paper develops a new comparative data set on the usage of electricity in the manufacturing sectors of the USA, Britain, France, Germany and Japan and proceeds to evaluate the hypothesis of a productivity bonus as postulated by many existing GPT models. Using the case of the diffusion of electrical power in the early twentieth century this paper shows that there was no generalized productivity boost from electrical power diffusion as postulated by many existing GPT models. The productivity gains from this GPT varied widely across economies and industries, suggesting that the power of GPTs to predict aggregate or sectoral growth is limited.
    Keywords: General Purpose Technologies, Economic Growth, Economic History,Productivity, Long Swings
    JEL: N11 N12 N13 N14 N60 O40
    Date: 2014–04–16
  6. By: Alexander Knobel (Gaidar Institute for Economic Policy)
    Abstract: The article addresses the issue of fiscal policy risks in countries with an abundance of natural resources, including Russia. It is demonstrated which consequences Russia’s federal budget may be faced with as a result of declining oil prices. In the context of phenomena typical of resource-dependent economies, it is shown that they have a tendency toward a lower rate of long-term economic growth. The macroeconomic and institutional aspects of the resource curse and the role of sovereign funds in shaping up the budget policy are discussed, with a special emphasis being made on their institutional importance.
    Keywords: resource curse, budget policy, institutions, economic growth, sovereign funds.
    JEL: H61 O11 Q32
    Date: 2014
  7. By: Van Hoang
    Abstract: This paper reproduces a version of the New Keynesian model developed by Ireland (2004) and then uses the Vietnamese data from January 1995 to December 2012 to estimate the model’s parameters. The empirical results show that before August 2000 when the Taylor rule was adopted more firmly, the monetary policy shock made considerable contributions to the fluctuations in key macroeconomic variables such as the short-term nominal interest rate, the output gap, inflation, and especially output growth. By contrast, the loose adoption of the Taylor rule in the period of post-August 2000 leads to a fact that the contributions of the monetary policy shock to the variations in such key macroeconomic variables become less substantial. Thus, one policy implication is that adopting firmly the Taylor rule could strengthen the role of the monetary policy in driving movements in the key macroeconomic variables, for instance, enhancing economic growth and stabilizing inflation.
    Keywords: New Keynesian model, Monetary Policy, Technology Shock, Cost-Push Shock, Preference Shock.
    JEL: E12 E32
    Date: 2014–02–01
  8. By: Marta Gómez-Puig (Department of Economic Theory, Riskcenter-IREA, Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: This paper contributes to the literature by applying the Granger-causality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behaviour. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases, provide clear evidence of contagion in the aftermath of the current euro debt crisis.
    Keywords: Sovereign bond yields, Granger causality, contagion, Euro area
    Date: 2014–02

This nep-fdg issue is ©2014 by Iulia Igescu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.