nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒06‒22
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Medium and long run prospects for UK growth in the aftermath of the financial crisis By Nicholas Oulton
  2. Investment, growth and employment: VECM for Uruguay By Lucia Ramirez; Gabriela Mordecki
  3. Why Don't Remittances Appear to Affect Growth? - Working Paper 366 By Michael Clemens and David McKenzie
  4. Finance and Productivity Growth: Firm-level Evidence By Levine, Oliver; Warusawitharana, Missaka
  5. Population, land, and growth By Claire Loupias; Bertrand Wigniolle
  6. Is Financial Development Bad for Growth? By Zhang, Lu; Grydaki, Maria; Bezemer, Dirk
  7. Macrodynamics of debt-financed investment-led growth with interest rate rules By Datta, Soumya
  8. Welfare models, inequality and economic performance during globalisation By Pasquale Tridico
  9. The Mechanics of Real Undervaluation and Growth By Wlasiuk, Juan Marcos
  10. Productivity and potential output before, during, and after the Great Recession By Fernald, John G.
  11. Pushing on a string: US monetary policy is less powerful in recessions By Silvana Tenreyro; Gregory Thwaites
  12. A Model of Slow Recoveries from Financial Crises By Queraltó, Albert

  1. By: Nicholas Oulton (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM))
    Abstract: In this paper I argue that the financial crisis is likely to have a long term impact on the level of labour productivity in the UK while leaving the long run growth rate unaffected. Based entirely on pre-crisis data, and using a two-sector growth model, I project the future growth rate of GDP per hour in the market sector to be 2.61% p.a. Based on a cross-country panel analysis of 61 countries over 1950-2010, the permanent reduction in the level of GDP per worker resulting from the crisis could be substantial, about 5½%. The cross-country evidence also suggests that there are permanent effects on employment, implying a possibly even larger hit to the level of GDP per capita of about 9%.
    Keywords: productivity, potential output, growth, financial, banking crisis, recession
    JEL: J24 E32 O41 G01 H63
    Date: 2013–12
  2. By: Lucia Ramirez (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriela Mordecki (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: Investment is a key to analyze an economy’s growth, as its increase the economy productive capacity, either expanding the capital stock as incorporating new technology that makes the production process more efficient. In Uruguay, investment has substantially increased in recent years, both overall and sectoral. This would have occurred as a result of strong growth in the period, as well as government policies on investment promotion. Growth and investment evolution, together with employment, has undergone a long history in economic theory. In that sense, there are empirical studies that support the theory that investment precedes growth, while there are others that provide evidence to the hypothesis that growth determines investment. Through a model with vector error correction (VECM) we found a long-term relationship between GDP without primary activity, investment and urban workers of Uruguay. In this model we observe a positive relationship between GDP and the other two variables, where GDP precedes both urban workers and investment.
    Keywords: investment, growth, employment, cointegration
    JEL: B23 E22 F43
    Date: 2014–06
  3. By: Michael Clemens and David McKenzie
    Abstract: While measured remittances by migrant workers have soared in recent years, macroeconomic studies have difficulty detecting their effect on economic growth. We review existing explanations for this puzzle and propose three new ones. First, we offer 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, we show that even if these increases were correctly measured, cross-country regressions would have too little power to detect their effects on growth. Third, we point 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 GDP; but detecting their effects on growth of the origin economy is likely to remain elusive.
    Keywords: remittances, growth, migration, measurement
    JEL: F24 F22 E01 O15
    Date: 2014–05
  4. By: Levine, Oliver (University of Wisconsin); Warusawitharana, Missaka (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using data on a broad set of European firms, we find a strong positive relationship between the use of external financing and future productivity (TFP) growth within firms. This relationship is robust to various measures of financing and productivity, and strengthens as financing costs increase. We provide evidence against a reverse-causality explanation by showing that this relationship arises from the component of TFP that is outside the information set of the firm. These findings indicate that financial development supports productivity growth within firms, and helps explain why economic activity remains persistently depressed following financial crisis.
    Keywords: Finance-growth nexus; financial crisis; total factor productivity (TFP)
    Date: 2014–02–24
  5. By: Claire Loupias (EPEE - Centre d'Etudes des Politiques Economiques - Université d'Evry-Val d'Essonne); Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper suggests a new explanation for changes in economic and population growth with a long run perspective, emphasizing the role of land in the development process. Starting from a pre-industrialization state called the "Malthusian regime", land and labor are the main production factors. The size of population is limited by the quantity of land available for households and by incomes. Technical progress driven by a "Boserupian effect" may push the economy towards a take-off regime. In this regime, capital accumulation begins and a "learning-by-doing" effect in production takes over from the "Boserupian effect". If this effect is strong enough, the economy can reach an "ultimate growth regime". In the different phases, land plays a crucial role.
    Keywords: Endogenous fertility; Land; Endogenous growth;
    Date: 2013
  6. By: Zhang, Lu; Grydaki, Maria; Bezemer, Dirk (Groningen University)
    Abstract: Is financial development good for growth? In new data, we find that the growth effect of bank credit-to-GDP ratios - the traditional measure for financial development - is on average negative for 46 economies over 1990-2011. We explain this by the changing composition of credit. Financial development since 1990 was mostly due to growth in credit to real estate and other asset markets. The share of credit to nonfinancial business in total credit decreased sharply. We find negative growth coefficients for credit-to-GDP stocks supporting asset markets. In contrast, we estimate robustly positive growth effects of credit flows to nonfinancial business and insignificant effects of credit flows to asset markets, including real estate. The positive growth effect of credit flows diminishes at higher levels of financial development. Our findings are in line with recent suggestions that high ratios of financial capital to GDP since the 1990s may depress growth, through real negative returns to capital (Summers, 2013; Piketty, 2014). Even though credit flows may give a short-term stimulus to growth, the longer term effect of financial development is negative.
    Date: 2014
  7. By: Datta, Soumya
    Abstract: This paper demonstrates the diverse dynamical possibilities arising out of a simple macroeconomic model of debt-financed investment-led growth in the presence of interest rate rules. We show possibilities of convergence to steady state, growth cycles around it as well as various complex dynamics. We investigate whether, given this framework, the financial sector can provide endogenous bounds to an otherwise unstable system. The effectiveness of monetary policy in the form of a Taylor-type interest rate rule targeting capacity utilization is examined under this context.
    Keywords: Growth cycles, Hopf bifurcation, complex dynamics, Taylor rule.
    JEL: C62 C69 E12 E32 E44 G01
    Date: 2014–06
  8. By: Pasquale Tridico
    Abstract: The objective of this paper is to explore whether “the efficiency thesis” concerning the relation between welfare states and globalisation is functional for economic growth or, alternatively, whether “the compensation thesis” produces better results in terms of economic growth. The current crisis (2007-12) was a test for many advanced economies to determine whether the socio-economic model that those countries built in the last several decades was able to cope with the challenges of globalisation. My hypothesis is that the efficiency thesis, according to which globalisation needs to be accompanied by the retrenchment of welfare states in order for firms to be competitive, does not causegrowth. The tests are conducted in a sample of 42 countries made up of OECD and EU members. On the contrary, our econometric exercises indicate that the “compensation thesis” (i.e.,regulated globalisation and an expanded welfare state) is better able to produce higher economic growth.
    Keywords: welfare states, inequality, globalisation, financialisation, economic crisis
    JEL: I38 P51 G01
    Date: 2014–06
  9. By: Wlasiuk, Juan Marcos
    Abstract: The media and policy makers often mention that China manipulates its real exchange rate (RER) in order to improve its exports and boost growth. This view, however, is not supported by the most prominent economic models, which do not predict a positive relationship between real undervaluation and economic growth. I propose a 3-sector model with labor market frictions that explains how a policy aimed at increasing domestic savings and depreciating the RER can, at the same time, generate real growth through a reallocation of workers from a low-productivity traditional sector into a high-productivity manufacturing sector. The policy is particularly effective in countries with relative abundance of labor, scarcity of agricultural resources, and high barriers for the entry of workers into the manufacturing sector. Empirically, I verify that higher real undervaluation (measured as deviations from PPP) is positively associated with GDP and manufacturing growth in countries with lower per capita agricultural land and higher rural population. The relationship vanishes and even becomes negative in the opposite cases. Finally, I propose a simple methodology for the identification of real depreciations exogenously induced (i.e. that are not related to changes in productivities or in terms of trade). I find that, during the last 20 years, such episodes have been mainly observed in East Asian developing countries.
    Keywords: Real Exchange Rate, Growth, Labor Market Frictions, Urban-Rural Migration, China
    JEL: E5 E58 F31 F43 J61 O11
    Date: 2013–06
  10. By: Fernald, John G. (Federal Reserve Bank of San Francisco)
    Abstract: U.S. labor and total-factor productivity growth slowed prior to the Great Recession. The timing rules explanations that focus on disruptions during or since the recession, and industry and state data rule out “bubble economy” stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains. A calibrated growth model suggests trend productivity growth has returned close to its 1973-1995 pace. Slower underlying productivity growth implies less economic slack than recently estimated by the Congressional Budget Office. As of 2013, about ¾ of the shortfall of actual output from (overly optimistic) pre-recession trends reflects a reduction in the level of potential.
    Keywords: Potential output; productivity; information technology; business cycles; multi-sector growth models
    JEL: E23 E32 O41 O47
    Date: 2014–06–13
  11. By: Silvana Tenreyro (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM)); Gregory Thwaites (Centre for Macroeconomics (CFM))
    Abstract: We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend exibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to diferences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.
    Keywords: asymmetric effects of monetary policy, transmission mechanism, recession, durable goods, local projection methods
    JEL: E32 E52
    Date: 2013–10
  12. By: Queraltó, Albert (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper documents highly persistent effects of financial crises on output, labor productivity and employment in a sample of emerging economies. To address these facts, it introduces a quantitative macroeconomic model that includes endogenous TFP growth through firm creation. Firm creators obtain funding from a financial intermediation sector which is subject to frictions. These frictions become especially severe in a financial crisis, increasing the cost of credit for firm creators and thereby lowering the growth rate of aggregate TFP. As a consequence, the model produces medium-run dynamics following crises that are in line with the data.
    Keywords: Business cycles; financial crises; total factor productivity
    Date: 2013–12–18

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