nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒05‒04
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Stock Market Development and Economic growth in India: An Empirical Analysis By P., Srinivasan
  2. FDI and Long-term Economic Growth in Russia By TAGANOV, BORIS
  3. Regime Change, Democracy, and Growth By Caroline Freund; Mélise Jaud
  4. Impact of Energy Consumption and Environmental Degradation on Economic Growth in Nigeria By Yusuf, Sulaimon Aremu
  5. The Role of Education for the Economic Growth of Bulgaria By Neycheva, Mariya
  6. The Electricity Consumption in a Rentier State: Do Institutions Matter? By Bouoiyour, Jamal; Selmi, Refk; Shahbaz, Muhammad
  7. Throwing the Spanner in the Works: The Mixed Blessing of FDI By Jakob Schwab
  8. Impact of FDI on GDP: An Analysis of Global Economy on Production Function By Khan, Shiraz; Mehboob, Farhan
  9. Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia By Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
  10. Schooling and Economic Growth: What Have We Learned? By Theodore R. Breton
  11. Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession By Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
  12. Does Islamic Finance Outperform Conventional Finance ? Further Evidence from the recent financial crisis By Fredj Jawadi; Nabila Jawadi; Waël Louhichi

  1. By: P., Srinivasan
    Abstract: The link between stock market development and economic activity has always been the subject of considerable debate in the field of economics and it raises empirical question whether stock market development influences economic activity or whether it is a consequence of increased economic activity. This study attempts to investigate the direction of causality between stock market development and economic growth in the Indian context. Using the cointegration and causality tests for the period June 1991 to June 2013, the study confirms a well defined long-run equilibrium relationship between the stock market development indicators and economic growth in India. The empirical results show bidirectional causality between market capitalisation and economic growth and unidirectional causality from turnover ratio to economic growth in the long-run and short-run. By and large, it can be inferred that the stock market development indicators viz. market capitalisation and turnover ratio have a positive influence on economic growth in India.
    Keywords: Stock Market Development, Cointegration, Granger Causality, Economic Growth
    JEL: C58 E44 O16
    Date: 2014–05–01
    Abstract: In this paper we consider relationship between foreign direct investment (as one of the mechanisms of technological development) and long-term economic growth. In the beginning we discuss the role of FDI in the increase of total factor productivity from the viewpoint of endogenous growth theory. We then turn to the comparative analysis of FDI inflow to Russia and other countries broken down by economic industries. We find that Russian industries capable of increasing TFP and positively impacting the long-term economic growth are significantly underinvested relative to other countries. Since, in our opinion, pre-existing sources of Russia’s economic growth are almost completely exhausted, we suggest several economic policy measures aimed at attracting FDI in Russia and improve the absorptive capacity of the country.
    Keywords: FDI, TFP, economic growth, human capital, economic policy
    JEL: E66 F21 O15 O43
    Date: 2014–04
  3. By: Caroline Freund (Peterson Institute for International Economics); Mélise Jaud (World Bank)
    Abstract: The empirical literature on the relationship between democracy and growth has yielded conflicting results. Cross-country studies have failed to identify a significant impact of democracy on growth, while within-country studies have found a strong positive effect of the transition to democracy on growth. We reconcile the conflicting evidence by showing that the positive effect of democratic transitions results from regime change as opposed to democratization. We identify over 100 transitions in the last half-century with various outcomes: to and from democracy, some partial, and some failed. The variety of experiences allows us to compare the growth outcome of democratic transitions with that of other transitions rather than with a no-transition counterfactual. Conditioning on regime change filters out selection effects and shows that transition to democracy yields no growth dividend compared to other types of regime change. We also show that countries that democratize slowly do not gain from regime change. These results suggest that the growth dividend from political transition results from swift regime change rather than from democratization.
    Keywords: political transition, autocracy, event study
    JEL: N40 O43
    Date: 2014–04
  4. By: Yusuf, Sulaimon Aremu
    Abstract: The argument concerning the contribution of energy towards the growth objective and the adverse environmental impact its consumption brings along are contentious, whether to reduce energy consumption in order to reduce negative externality as it is just an intermediate input which its contribution is insignificant to the accomplishment of growth objective is the curiosity behind this study. The study empirically examined the impact of energy consumption and carbon emission on economic growth in Nigeria between 1981 and 2011. The research takes analytical/quantitative dimension. It is a multivariate study by including in the model two conventional determinants of Economic Growth, Capital proxy by Gross Capital Formation, labour proxy by labour participation rate, and other variables of study which are electricity consumption, energy use kt in oil equivalent and Co2 emission. Restricted Error Correction Model (VAR) is used, Impulse Response function was carried out and the necessary diagnostic tests were examined with the aid of Econometrics View Package (E- view). The study reveals that the long run relationship exists among the variables and electricity contributes significantly to the economic growth. Further investigation using Granger causality analysis to examine the causal directions among the variables reveals bidirectional causality between electricity consumption and economic growth and indicates unidirectional causality running from energy use kt of oil to carbon emission. This brings the study to conclusion that electricity is not just an intermediate input; its contribution to the accomplishment of growth objective cannot be relegated to the background. Hence, Nigeria can pursue triple goals of energy security by exploiting renewable energy source, environmental sustainability and sustainable inclusive growth. Therefore necessary recommendations were made.
    Keywords: Energy Consumption, Carbon Emission, Economic Growth
    JEL: Q43
    Date: 2014–01–06
  5. By: Neycheva, Mariya
    Abstract: The paper presents results of a study which estimates the impact of human capital on growth in Bulgaria over the period 2000-12. The empirical models are based on the extended Cobb-Douglas production with three inputs ─ labor, physical capital and human capital. Export and Foreign Direct Investments (FDI) are included as well. The quantity of human capital is measured by the share of people in the labor force aged 25-64 having completed at least upper secondary education. The outcome suggests that the share of people with upper secondary education enters insignificantly the regression model. Moreover, its short-run accumulation is related negatively to real output per capita. When tertiary education is considered, the result is positive and statistically significant. In general, the study cannot fully support the hypothesis that education fosters growth because people with upper secondary education twice outnumber those with tertiary education. The results also imply that the upward trend of real output is attributed mainly to FDI, physical capital accumulation and export. A reasonable explanation of the non-significant role of secondary education is that the quality of human capital is a crucial factor for growth especially in countries where the average educational level is relatively high. According to the results of a partial correlation analysis foreign language proficiency explains a large part of the variation in output per capita across Europe.
    Keywords: Human capital, Higher Education, Secondary Education, Growth, Foreign language proficiency, Bulgaria
    JEL: H52 J24 O40
    Date: 2014–04
  6. By: Bouoiyour, Jamal; Selmi, Refk; Shahbaz, Muhammad
    Abstract: The core focus of this paper is to assess the relationship between the electricity consumption and institutions within rentierism phenomenon by incorporating economic growth, urbanization, trade openness and foreign direct investment in the case of Algeria. To this end, we have applied the ARDL bounds testing approach to cointegration and innovative accounting approach (variance decomposition and impulse response methods) over the period of 1971-2012. Our empirical results show that these variables are cointegrated in the long-run. We find that institutions play an important role to explain this cointegration. The response of electricity demand is increasingly negative due to the one standard deviation shock in institutions. This highlights an insightful evidence, providing that the poor governance drawbacks in a rentier state may affect directly electricity consumption or indirectly via urbanization and foreign direct investment. The contribution of economic growth to electricity consumption appears minor (the conservation hypothesis is limitedly supported), while that of trade openness seems insignificant.
    Keywords: Electricity consumption, institutions, rentier state.
    JEL: Q4 Q43
    Date: 2014–03–31
  7. By: Jakob Schwab (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: FDI is generally attributed to have positive impact for developing countries. In contrast, this paper shows that foreign capital inflows may cause an economy to be stuck in a middle-income trap. Introducing a simple capital market imperfection into a standard neoclassical (open-economy) model of growth, I show that FDI crowds out domestic investment when countries are still growing. If profitable investments are pursued by foreign capital owners, this does reduce chances for domestic entrepreneurs that they would have otherwise been able to take, by means of economy-wide savings. The long term losses due to the crowding-out effect occur despite the short-term gains that sudden capital inflows entail, as in static models. At the same time, savings that are not invested leave the country in turn, generating reverse capital flows.
    Keywords: FDI, financial market globalization, welfare effects, open-economy growth, middle income trap, two-way capital flows
    JEL: F21 F43 F54 O16
    Date: 2014–02–21
  8. By: Khan, Shiraz; Mehboob, Farhan
    Abstract: This study examines the effects of Foreign Direct Investment Inflows on Gross Domestic Product on the production function theory by balanced panel data of World Development Indicators from 1992 to 2010 of 59 countries representing the global economy. The empirical analysis on basis of generalized least squares estimator with random effects suggests that there is a significant positive relationship between all the variables of Production Function including Gross Domestic Product and Foreign Direct Investment Inflows. The unit root test confirms the model’s predictive validity and all the three variables significantly explain variation in the Gross Domestic Product, Co-integration test confirms the long-run relationship and Granger causality test finally identifies the presence of unidirectional causality among Gross Domestic Product and Foreign Direct Investment Inflows and Bidirectional causality between the all variables of the original production function. It is recommended for the host nations to emphasize on pro-capital polices to attract and maximize foreign direct investment inflows which will ultimately increase Gross Domestic Product of the host nations.
    Keywords: Foreign Direct Investment, Gross Domestic Product, Production Function.
    JEL: F02 F3 F4 F40 F41 F43 Z00
    Date: 2014–01–15
  9. By: Nidia Ruth Reyes; José Eduardo Gómez G.; Jair Ojeda Joya
    Abstract: We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics.
    Keywords: Monetary policy transmission, Bank lending channel, Risk taking channel, Colombia
    JEL: E5 E52 E59 G21
    Date: 2013–06–17
  10. By: Theodore R. Breton
    Abstract: This paper explains why different studies present widely-varying estimates of the effect of increased schooling on national income. It shows that when correctly-interpreted, these studies support the hypothesis that a one-year increase in average schooling attainment raises national income directly by about 10% and indirectly by about 19%. The increases in national income are larger than the aggregate effect of higher workers’ salaries, because schooling has external effects on national income. Due to the rising cost of additional years of schooling, the national return on investment in schooling is much lower in more educated countries. The estimated real national return on investment in schooling in 2005 ranged from over 40% in the least educated countries to 8.5% in the most educated countries. Average levels of schooling and average test scores at ages 9 to 15 generally rise together, so either measure of human capital can explain differences in national income or growth rates across countries. Since the productivity of physical capital depends on the level of human capital, in a global financial market, the growth in human capital largely determines the growth in physical capital and in national income. ***** Este documento explica por qué diferentes estudios presentan ampliamente diferentes estimaciones sobre el efecto del aumento de la escolarización en la renta nacional. Esto demuestra que cuando se interpreta correctamente, estos estudios apoyan la hipótesis de que un aumento en un año en el nivel medio de escolaridad aumenta el ingreso nacional directamente en un 10% e indirectamente alrededor del 19%. Los aumentos en la renta nacional son más grandes que el efecto agregado de los salarios más altos de los trabajadores, ya que la escolarización tiene efectos externos sobre el ingreso nacional. Debido al creciente costo de los años adicionales de escolaridad, el retorno de la inversión nacional en educación es mucho menor en los países con mayor nivel educativo. El retorno nacional real estimado de la inversión en la educación en 2005 osciló entre el 40% en los países menos educados hasta el 8,5% en los países más cultos. Los niveles promedio de escolaridad y calificaciones de los exámenes a edades promedio de 9 a 15 generalmente aumentan en conjunto, así que o medida de capital humano pueden explicar las diferencias en el ingreso nacional o las tasas de crecimiento entre los países. Dado que la productividad del capital físico depende del nivel de capital humano, en un mercado financiero global, el crecimiento en capital humano determina en gran medida el crecimiento en capital físico y en el ingreso nacional.
    Keywords: Schooling; Human Capital; Test Scores; Economic Growth
    JEL: O41 I25
    Date: 2014–04–07
  11. By: Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
    Abstract: Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.
    Date: 2014–03
  12. By: Fredj Jawadi; Nabila Jawadi; Waël Louhichi
    Abstract: This paper aims to study the performance of Islamic finance regarding that of conventional finance over the last decade. This question is particularly interesting as within the current financial crisis, conventional finance is being rather ineffectual and risky and that in the same time one can expect that Islamic finance innovations could enable investors to get higher performance and lower risk. Indeed, thanks to the ethical and moral aspect of Islamic finance, its products seem to be more attractive to reinsure investors, control financial risk, stabilize financial systems and help to avoid future financial downturns. In this paper, we address this question using different indicators and measures of performance that we have applied to several conventional and Islamic stock indexes. While our findings seem to be heterogeneous over the whole period under consideration (2000 – 2011), we note that conventional financial products show higher returns than those of Islamic finance over the first subperiod (2000- 2006), while the Islamic finance outperforms classical finance during turbulent times and the financial crisis (2006- 2011). Such excess of performance during economic downturns may be explained by the fact that Islamic funds tend to avoid investing in high risk assets and are therefore less affected by economic crises. This implies that while keeping eyes on Islamic finance products, investors may expect high returns and less risk. Our findings also indicate that the investment in Islamic financial products may generate significant diversification benefits.
    Keywords: Islamic Finance, Financial Crisis, Innovations, Performance.
    JEL: G01 G10
    Date: 2014–04–29

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