nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒11‒01
five papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. The Nexus between Military Expenditures and Economic Growth in the BRICS and the US: A Bootstrap Panel Causality Test By Ming Zhong; Tsangyao Chang; Samrat Goswami; Rangan Gupta
  2. Real-time forecasting us GDP from small-scale factor models By Máximo Camacho; Jaime Martínez-Martín
  3. Public Goods, Redistribution, and Growth: A Classical Model By Daniele Tavani; Luca Zamparelli
  4. Does Public Education Expansion Lead to Trickle-Down Growth? By Böhm, Sebastian; Grossmann, Volker; Steger, Thomas M.
  5. Interactions between Monetary Policy and Fiscal Policy By António Afonso; Raquel Balhote

  1. By: Ming Zhong (Shanghai University of Finance and Economics,School of Finance, Shanghai, CHINA); Tsangyao Chang (Department of Finance, Feng Chia University Taichung, TAIWAN); Samrat Goswami (Department of Rural Management and Development Tripura University, Tripura, INDIA); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This study re-examines the causal linkages between military expenditures and economic growth for the BRICS countries (Brazil, Russia, India, China, and South Africa) and that for the USA for the period 1988-2012. Panel causality was examined to explain dependency and heterogeneity across countries. The results of Granger causality tests show that military expenditures influence economic growth in the United States, economic growth influence military expenditures in both Brazil and India, a feedback between military expenditures and economic growth in Russia, and no causal link exists between military expenditures and economic growth in China and South Africa. These results indicate that the causality between military expenditures and economic growth varies across countries with different conditions. The findings of this study could provide important policy implications for the BRICS countries and also for the United States.
    Keywords: Military Expenditures, Economic Growth, Dependency and Heterogeneity, Bootstrap Panel Granger Causality Test, BRICS Countries
    JEL: H56 O41 C23
    Date: 2014–10
  2. By: Máximo Camacho (Universidad de Murcia); Jaime Martínez-Martín (Banco de España)
    Abstract: We show that the single-index dynamic factor model developed by Aruoba and Diebold (Am Econ Rev, 100:20-24, 2010) to construct an index of US business cycle conditions is also very useful for forecasting US GDP growth in real time. In addition, we adapt the model to include survey data and financial indicators. We find that our extension is unequivocally the preferred alternative for computing backcasts. In nowcasting and forecasting, our model is able to forecast growth as well as AD and better than several baseline alternatives. Finally, we show that our extension could also be used to infer US business cycles with great accuracy.
    Keywords: real-time forecasting, economic indicators, business cycles.
    JEL: E32 C22 E27
    Date: 2014–10
  3. By: Daniele Tavani (Department of Economics, Colorado State University (USA).); Luca Zamparelli (Sapienza, University of Rome)
    Abstract: We extend the basic Classical growth model by introducing a productive and redistributive role for the public sector in an economy populated by two classes, workers (who supply labor, consume, and do not save) and capitalists (who own capital stock, consume and save). The government levies a tax on profits in order to: (i) finance the provision of a public good that augments the production possibilities of the economy, and (ii) integrate labor incomes through a transfer to workers. Following Michl (2009), we focus on two different model ‘closures’, which deliver an endogenous and an exogenous growth rate respectively. In both cases, the analysis of taxation and government spending composition between public goods and transfers requires to specify the government’s preferences. In the endogenous growth model, the government’s choice fixes long-run growth and income distribution. In the exogenous growth model, policy decisions determine income distribution and the employment rate.
    Keywords: Classical growth, functional distribution, redistributive policy.
    JEL: D33 E11 O38
    Date: 2014–10
  4. By: Böhm, Sebastian; Grossmann, Volker; Steger, Thomas M.
    Abstract: The paper revisits the debate on trickle-down growth in view of the widely discussed evolution of the earnings and income distribution that followed a massive expansion of higher education. We propose a dynamic general equilibrium model to dynamically evaluate whether economic growth triggered by an increase in public education expenditure on behalf of those with high learning ability eventually trickles down to low-ability workers and serves them better than redistributive transfers. Our results suggest that, in the shorter run, low-skilled workers lose. They are better off from promoting equally sized redistributive transfers. In the longer run, however, low-skilled workers eventually benefit more from the education policy. Interestingly, although the expansion of education leads to sustained increases in the skill premium, income inequality follows an inverted U-shaped evolution.
    Keywords: Directed Technological Change; Publicly Financed Education; Redistributive Transfers; Transitional Dynamics; Trickle-Down Growth
    JEL: H20 J31 O30
    Date: 2014–10–21
  5. By: António Afonso; Raquel Balhote
    Abstract: Using a panel data set of 14 EU countries from 1970 to 2012, we study the type of monetary and fiscal policies of both authorities, and assess how they are influenced by certain economic variables and events (the Maastricht Treaty, the Stability and Growth Pact, the Euro and crises). Results show that inflation has a significant impact on monetary policy, and that governments raise their primary balances when facing increases in debt. Another goal is to characterise the type of interactions established between central banks and national governments, i.e. if their policies complement one another, or whether there is a more dominant one. Still, our results point to the lack of evidence concerning central banks’ response to fiscal policy.
    Keywords: interactions, monetary policy, fiscal policy, reaction functions.
    JEL: E52 E62 E63 H62
    Date: 2014–07

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.