nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒05‒09
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Some Thoughts on East Asian Economic Growth By Cheng Hsiao
  2. Openness to International Trade and Economic Growth : A Cross-Country Empirical Investigation By Bulent Ulasan
  3. A knowledge economy approach in empirical growth models for the Nordic countries By Arusha Cooray; Marcella Lucchetta; Antonio Paradiso
  4. A Note on Endogenous Growth with Public Capital By Bhattacharyya, Chandril
  5. Sovereign Debt in the U.S. and Growth Expectations By Juan Equiza Goni
  6. Labor force participation rate and economic growth: observations for Turkey By KARGI, Bilal
  7. Public expenditure distribution, voting, and growth By Lorenzo Burlon
  8. Public debt is always toxic to economic growth By Juhana Hukkinen; Matti Viren
  9. Sovereign debt markets in turbulent times: creditor discrimination and crowding-out effects By Fernando Broner; Alberto Martin; Jaume Ventura; Aitor Erce
  10. Fiscal consolidation in times of crisis: is the sooner really the better? By Christophe Blot; Marion Cochard; Jérôme Creel; Bruno Ducoudre; Danielle Schweisguth; Xavier Timbeau
  11. Why don't remittances appear to affect growth ? By Clemens, Michael A.; McKenzie, David
  12. Fiscal policy as an instrument of investment and growth By Basu, Kaushik
  13. The impact of oil revenues on the Iranian economy and the Gulf states By Dreger, Christian; Rahmani, Teymur

  1. By: Cheng Hsiao
    Date: 2013–10–14
  2. By: Bulent Ulasan
    Abstract: This paper examines the long-run relationship between trade open-ness and economic growth across countries over the period 1960-2000. Two strategies are followed in empirical investigation. First, we extend the augmented neo-classical growth model with an openness variable and estimate it by using a battery of openness measures suggested in the literature. We also construct three composite trade policy indexes consisting of weighted averages of tari® rates, non-tari® barriers and black market premium for foreign exchange rate. Second, we implement Bayesian model averaging technique to deal with the model uncertainty, a fundamental problem which has been plaguing the previous works on the topic. Our ¯ndings show that there is no robust link between trade openness and long-run economic growth.
    Keywords: Economic Growth, Trade Openness, Cross-Country Growth Regression, Model Uncertainty, Bayesian Model Averaging
    JEL: F43 O47 C11 C21 C52
    Date: 2014
  3. By: Arusha Cooray (University of Wollongong); Marcella Lucchetta (Ca’ Foscari Univeristy, Venice (Italy), Department of Economics); Antonio Paradiso
    Abstract: We estimate, employing a “knowledge economy” approach, the steady state growth rate for the Nordic countries. An endogenous growth framework is developed, in which total factor productivity is a function of human capital (measured by average years of education), trade openness, research and development, and investment ratio. We identify the key variables having a significant level and growth effects within this framework. We find that education plays an important role on the long-run growth rates of Sweden, Norway, and Denmark; trade openness, instead, has growth effects in Sweden, Finland, and Iceland. The investment ratio is able to explain patterns of growth only in Finland. Surprisingly, research and development has no level or growth effects in any of the Nordic countries. This may be attributable to the fact that research and development are driven by openness and education. Policy measures are identified to improve the long-run growth rates for these countries.
    Keywords: Endogenous growth models, Trade openness, human capital, investment ratio, Steady state growth rate, Nordic countries
    JEL: C22 O52 O40
    Date: 2013
  4. By: Bhattacharyya, Chandril
    Abstract: This paper develops a two sector model of endogenous economic growth with public capital where private goods and public investment goods are produced with different production technologies. The government buys public investment goods produced by private producers; and the government is a monopsonist in this market. We analyse properties of growth rate maximizing and welfare maximising fiscal policies in the steady state equilibrium. It is shown that the government cannot (can) control the production of public investment good changing the income tax rate (price of public investment good). The growth rate maximizing price of the public investment good is not necessarily equal to its competitive price. However, growth rate maximising income tax rate is equal to the elasticity of private good’s output with respect to public capital but is independent of technology in public good production. Welfare maximising solution is not necessarily identical to the growth rate maximising solution even in the steady state equilibrium.
    Keywords: Income taxation; Price of public good; Endogenous growth; Steady-state equilibrium; Public capital
    JEL: H21 H41 O41
    Date: 2014–05–05
  5. By: Juan Equiza Goni
    JEL: H63 H68 E21
    Date: 2014–04
  6. By: KARGI, Bilal
    Abstract: Although some discussions about the relation between population and the economic growth are made for a long time, today there is a general opinion that the population growth has positive relation with the economic growth. This opinion is also supported by the empirical studies. Despite there is a growth directly advancing with the population growth, the advancing of the population in the opposite direction with the rate of the labor force participation is thought to be a paradox. This paradox reveals some concepts, namely, "jobless growth" and " unskilled growth". In this study, an explanation is sought about the remaining or less increasing of the rate of the labor force participation although a linear relation between the GDP and the population and the labor. The official statements refer that this paradox is related with the lack of female participation in the labor force and employment in the agricultural sector to be falling. This study tries to point that this quantity cannot create a quality although the growth is quantitative.
    Keywords: Economic Growth, Labor Force Participation Rate, Labor Markets, Turkey Economy.
    JEL: J01 O40
    Date: 2014–04
  7. By: Lorenzo Burlon (Bank of Italy)
    Abstract: In this paper we study why the misallocation of resources across different productive sectors tends to persist over time. To this end we propose a general equilibrium model that delivers two structural relations. On the one hand, the public expenditure distribution influences the future sectoral composition of the economy; on the other, the distribution of vested interests across sectors determines public policy decisions. The model predicts that different initial sectoral compositions entail different future streams of public expenditure and therefore different development paths.
    Keywords: public expenditure, sectoral composition, vested interests, economic growth
    JEL: O41 O43
    Date: 2014–04
  8. By: Juhana Hukkinen (Bank of Finland); Matti Viren (Bank of Finland and Department of Economics, University of Turku)
    Abstract: This paper deals with the debt-growth relationship using several time-series tools. The idea is to find out whether the inverse relationship between these variable can be detected without imposing any functional forms for the estimating relationship and whether the relationship does indeed reflect some nonlinear features. Thus recursive correlations with different orderings of the time-series are computed using the Reinhart & Rogoff panel data. After that, recursive correlations are re-estimated with data that are cyclically adjusted to reflect the structural features of these two variables. The nature of the relationship is also scrutinized by using various variable-parameter estimation techniques (Kalman Filter, Logistic functional form and recursive estimation). Finally, some analyses of causality are carried out using these (filtered) data. The analysis clearly shows that the inverse relationship is very robust indeed and it rather supports the “toxic debt” hypothesis than the cyclical debt accumulation hypothesis.
    Keywords: debt, government deficit, growth, causality
    JEL: E60 E62 E65
    Date: 2013–12
  9. By: Fernando Broner (CREI, Universitat Pompeu Fabra and Barcelona GSE); Alberto Martin (CREI, Universitat Pompeu Fabra and Barcelona GSE); Jaume Ventura (CREI, Universitat Pompeu Fabra and Barcelona GSE); Aitor Erce (Banco de España and European stability mechanism)
    Abstract: In 2007, countries in the euro periphery were enjoying stable growth, low deficits and low spreads. Then the financial crisis erupted and pushed them into deep recession, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sector, reducing investment and deepening the recession even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the euro zone, and how they may be addressed by policies at the European level.
    Keywords: sovereign debt, discrimination, crowding out, rollover crises, economic growth
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2014–02
  10. By: Christophe Blot (OFCE); Marion Cochard (OFCE); Jérôme Creel (OFCE); Bruno Ducoudre (OFCE); Danielle Schweisguth (OFCE); Xavier Timbeau (OFCE)
    Abstract: Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP.
    Keywords: public debt; fiscal multipliers; debt
    Date: 2014–04
  11. By: Clemens, Michael A.; McKenzie, David
    Abstract: Although measured remittances by migrant workers have soared in recent years, macroeconomic studies have difficulty detecting their effect on economic growth. This paper reviews existing explanations for this puzzle and proposes three new ones. First, it offers evidence that a large majority of the recent rise in measured remittances may be illusory -- arising from changes in measurement, not changes in real financial flows. Second, it shows that even if these increases were correctly measured, cross-country regressions would have too little power to detect their effects on growth. Third, it points out that the greatest driver of rising remittances is rising migration, which has an opportunity cost to economic product at the origin. Net of that cost, there is little reason to expect large growth effects of remittances in the origin economy. Migration and remittances clearly have first-order effects on poverty at the origin, on the welfare of migrants and their families, and on global gross domestic product; but detecting their effects on growth of the origin economy is likely to remain elusive.
    Keywords: Population Policies,Remittances,Debt Markets,Access to Finance,Currencies and Exchange Rates
    Date: 2014–05–01
  12. By: Basu, Kaushik
    Abstract: This paper investigates the role of fiscal guarantees in promoting infrastructure investment. Infrastructure is a critical driver of economic growth, but infrastructure entails significant up-front costs that yield benefits after a time lag. Investors hesitate to put their money down on private infrastructure ventures because of the long lag and governments do not give guarantees for reasons of fiscal prudence. The paper argues that governments and large investment guarantee agencies can in many situations give suitably-calibrated guarantees to private projects by exploiting the fact that a guarantee on one project can reduce the risk of another one failing. The paper works out the architecture of such guarantees, which can be fiscally prudent and yet boost investment, especially in infrastructure, and thereby promote growth.
    Keywords: Debt Markets,Access to Finance,Emerging Markets,Bankruptcy and Resolution of Financial Distress,Non Bank Financial Institutions
    Date: 2014–05–01
  13. By: Dreger, Christian; Rahmani, Teymur
    Abstract: In line with the neoclassical growth model a persistent stream of oil revenues might have a long lasting impact on GDP per capita in oil exporting countries through higher investment activities. This relationship is explored for Iran and the countries of the Gulf Cooperation Council (GCC) using (panel) cointegration techniques. The existence of cointegration between oil revenues, GDP and investment can be confirmed for all countries. While the cointegration vector is found to be unique for Iran, long run equations for GDP and investment per capita are distinguished for the Gulf countries. Both variables respond to deviations from the steady state, while oil income can be treated as weakly exogenous. The long run oil elasticities for the Gulf states exceed their Iranian counterparts. In addition, investment in Iran does not react to oil revenues in the long run. Hence, oil revenues may have been spend less wisely in Iran over the past decades. --
    Keywords: oil exporting countries,oil revenues,panel cointegration
    JEL: F43 O53 Q30 C33
    Date: 2014

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