nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒10‒03
eight papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Public spending and growth: the role of institutions By Atsuyoshi Morozumi; Francisco José Veiga
  2. Finance-Led Growth in the OECD since the 19th century: How Does Financial Development Transmit To Growth? By Jakob B. MADSEN; James B. ANG
  3. Increased longevity and social security reform : questioning the optimality of individual accounts when education matters By Gilles Le Garrec
  4. Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU By António Afonso; Luís Martins
  5. Impact of Macroprudential Policy Measures on Economic Dynamics: Simulation Using a Financial Macro-econometric Model By Hiroshi Kawata; Yoshiyuki Kurachi; Koji Nakamura; Yuki Teranishi
  6. Public Education and Social Security: A Political Economy Approach By Tetsuo Ono
  7. Does the Composition of Government Expenditure Matter for Long-run GDP Levels? By Gemmell, Norman; Kneller, Richard; Sanz, Ismael
  8. Financial Crises, Political Constraints, and Policy Responses By Zorobabel Bicabay; Daniel Kapp; Francesco Molteni

  1. By: Atsuyoshi Morozumi (School of Economics & CFCM, University of Nottingham); Francisco José Veiga (Universidade do Minho - NIPE)
    Abstract: This paper examines the role of institutions in the nexus between public spending and economic growth. Using a newly assembled dataset of 80 countries over the 1970-2010 period with disaggregated public spending, we show that only when institutions prompt governments to be accountable to the general public, does the capital component of public spending significantly promote growth, especially when financed by a fall in current spending or by increased revenues. Meanwhile, a rise in current spending does not show robust growth-promoting potential, regardless of the level of government accountability. Our interpretation of these findings is that, while capital spending innately has a larger growth-fostering effect than current spending, inefficiencies inherent in the former type of spending, caused by officeholders’ rent-seeking behavior under unaccountable governments, mitigate its fostering effect.
    Keywords: Public spending, Economic growth, Institutions
    JEL: O43 H50 O11
    Date: 2014
  2. By: Jakob B. MADSEN (Department of Economics, Monash University.); James B. ANG (Division of Economics, Nanyang Technological University)
    Abstract: It is well established in the literature that financial development (FD) is conducive to growth, and yet the channels through which FD affects growth are not well understood. Using a unique new panel data set for 21 OECD countries over the past 140 years, this paper examines the extent to which FD transmits to growth through ideas production, savings, fixed investment, and schooling. Unionization and agricultural share are used as instruments for FD. The empirical results show that FD influences growth through all four channels. In particular, ideas production is found to be the most important channel through which FD impacts on growth.
    Keywords: ideas production; savings; investment; schooling; growth; financial development.
    JEL: O16 O30 O40 O53
    Date: 2014–08
  3. By: Gilles Le Garrec (OFCE Sciences PO)
    Abstract: In many European countries, population aging had led to debate about a switch from conventional unfunded public pension systems to notional sys- tems characterized by individual accounts. In this article, we develop an overlapping generations model in which endogenous growth is based on an accumulation of knowledge driven by the proportion of skilled workers and by the time they have spent in training. In such a framework, we show that conventional pension systems, contrary to notional systems, can enhance eco- nomic growth by linking beneÖts only to the partial earnings history. Thus, to ensure economic growth, the optimal adjustment to increased longevity could consist in increasing the size of existing retirement systems rather than switching to national system
    Date: 2014–05
  4. By: António Afonso; Luís Martins
    Abstract: This paper provides new insights about the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data for 14 European Union countries over the period 1970-2012. Different measures for assessing fiscal consolidations based on the changes in the cyclically adjusted primary balance were calculated. A similar ad-hoc approach was used to compute monetary expansions, in order to include them in the assessment of non-Keynesian effects for different budgetary components. Panel Fixed Effects estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed in the cases of general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer and expenditure-based consolidations contribute positively for its success, whilst the opposite is the case for tax-based ones.
    Keywords: fiscal consolidation, monetary expansion non-Keynesian effects, panel data, probit
    JEL: C23 E21 E5 E62 H5 H62
    Date: 2014–07
  5. By: Hiroshi Kawata (Bank of Japan); Yoshiyuki Kurachi (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Bank of Japan)
    Abstract: This paper uses a financial macro-econometric model to compare and analyze the impact of macroprudential policy measures -- a credit growth restriction, loan-to-value and debt-to-income regulations, and a time-varying capital requirement -- on the economic dynamics through the financial cycle with the asset price bubble. Our analysis shows that although these macroprudential policy measures dampen economic volatility, it is possible that they reduce average economic growth, and the effects on the economic dynamics differ widely among macroprudential policy measures. In addition, the policy effects are changed dramatically by lags in recognizing the state of the economy. Our results also suggest that macroprudential policy measures can help contribute to more stable financial intermediation by raising the resilience of the financial system against risks.
    Date: 2013–02–20
  6. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study presents an overlapping-generations model with altruism towards children. We characterize a Markov-perfect political equilibrium of voting over two policy issues, public education for the young and social security for the old. The model potentially generates two types of political equilibria, one favoring public education and the other favoring social security. One equilibrium is selected by the government to maximize its objective. It is shown that (i) longevity affects equilibrium selection and relevant policy choices; and (ii) private education as an alternative to public education and a Markov-perfect political equilibrium can gen- erate the two types of equilibria.
    Keywords: Public education; Social security; Intergenerational conflict
    JEL: H52 H55 I22
    Date: 2013–09
  7. By: Gemmell, Norman; Kneller, Richard; Sanz, Ismael
    Abstract: We examine the long-run GDP impacts of changes in total government expenditure and in the shares of different spending categories for a sample of OECD countries since the 1970s, taking account of methods of financing expenditure changes and possible endogenous relationships. We provide more systematic empirical evidence than available hitherto for OECD countries. Our results provide strong evidence that reallocating total spending towards infrastructure and education would be positive for long-run income levels. Increasing the share of social welfare spending (and away from all others pro-rata) may be associated with, at most, modestly lower long-run GDP levels.
    Keywords: Government expenditure composition, Fiscal policy, GDP,
    Date: 2014
  8. By: Zorobabel Bicabay (African Development Bank); Daniel Kapp (European Central Bank); Francesco Molteni (Université Paris 1 and LabEx ReFi)
    Abstract: We analyze the political environment in the wake of financial crises and try to infer its implications on decision making and economic policies. Concretely, we investigate if a shift in the ideology of the government or changes of political constraints drive the implementation of economic policies around periods of financial stress. To this end, we apply a simultaneous equations approach to evaluate governments' responses to financial crises, given the impact of crises on the political and social environment. This method allows us to disentangle the direct effects from financial crises on public policy from the indirect effects induced by political and social changes. The proposed policy response model is able to take into account the possibility of a selection bias. The direct and indirect effects from financial crises on the political process are shown, where the indirect effect is defined as the impact of financial crises on the political orientation and political constraints. Furthermore, results suggest that changes in the political environment during financial crises do affect policy responses, although the effect is highly heterogeneous across different types of crises.
    JEL: C15 G01 G17 G22 G32
    Date: 2014–09–15

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