nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒12‒13
five papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds By Nikolaos Antonakakis
  2. Financial Integration and Growth: A Nonlinear Panel Data Analysis By Duygu Yolcu Karadam; Nadir Ocal
  3. Education and growth with learning by doing By Marconi G.; Grip A. de
  4. The growth impact of discretionary fiscal policy measures By Attinasi, Maria-Grazia; Klemm, Alexander
  5. Financial Development and Technology Diffusion By Diego Comin; Ramana Nanda

  1. By: Nikolaos Antonakakis (Department of Economics, Vienna University of Economics and Business)
    Abstract: Contributing to the contentious debate on the relationship between sovereign debt and economic growth, I examine the role of theory-driven (non-)sustainable debt-ratios in combination with debt-ratio thresholds on economic growth. Based on both dynamic and non-dynamic panel data analyses in the euro area (EA) 12 countries over the period 1970-2013, I find that non-sustainable debt-ratios above and below the 60% threshold, have a detrimental effect on short-run economic growth, while sustainable debt-ratios below the 90% threshold exert a positive influence on short-run economic growth. In the long-run, both non-sustainable and sustainable debt-ratios above the 90% threshold, as well as non-sustainable debt-ratios below the 60% compromise economic growth. Robustness analysis supports these findings, and provides additional evidence of a positive effect of sustainable debt-ratios below the 60% threshold, as predicated by the Maastricht Treaty criterion, on (short- and long-run) economic growth. Overall, these results suggest that debt sustainability in addition to debt non-linearities should be considered simultaneously in the debt-growth nexus. In addition, the results indicate the importance of a timely reaction of fiscal policy in countries with non-sustainable debts, as implied by fiscal rules, in an attempt to ensure fiscal sustainability and, ultimately, promote long-run economic growth.
    Keywords: Government debt, growth, sustainability, threshold, government budget constraint
    JEL: C23 E62 F43 H63 O40
    Date: 2014–10
  2. By: Duygu Yolcu Karadam (Department of Economics, METU); Nadir Ocal (Department of Economics, METU)
    Abstract: This paper employs Panel Smooth Transition Models (PSTR) to examine the financial integration and economic growth relationship for a large panel data set consisting of 82 countries and for three subsamples, namely emerging, industrial, and developing countries, for 1970-2010 periods. Unlike linear specifications with interaction terms, PSTR models are flexible enough to endogenously determine how the degree of institutional quality, financial sector development, trade openness, budget deficit, inflation volatility and financial integration can have a role in revealing asymmetries in financial integration-growth nexus. Except developing countries, empirical results strongly indicate nonlinear dynamics and imply that the impact of financial integration on growth is asymmetric depending on the threshold effects of these variables which show great variation not only from variable to variable but also for different country groups. As far as whole set of countries is concerned, our findings imply that countries having developed financial systems, qualified institutions and stable macroeconomic environment seem to be benefiting from financial integration. Moreover, nonlinear threshold effects are more apparent and different for emerging countries compared to the industrial countries. Unlike former economies, higher levels of financial integration and trade openness decrease benefits from financial openness for the industrial countries. Besides, high fiscal deficit has more pronounced negative effect on the growth of the industrialized countries compared to emerging economies and other indicators.
    Keywords: : Financial Integration, Economic Growth, Panel Smooth Transition Models, Nonlinearity.
    JEL: F41 F43 O40 F4 C23
    Date: 2014–11
  3. By: Marconi G.; Grip A. de (GSBE)
    Abstract: In this paper, we develop a general equilibrium overlapping generations model which is based on the view that education makes workers more productive by increasing their ability to learn from work experience, rather than providing skills that directly increase productivity. This assumption is discussed and compared with the dominant Mincerian view on the education-productivity relationship. One important implication of the model is that the enrolment rate to education has a negative effect on the GDP in the medium term and a positive effect in the long term. This could be an explanation for the weak empirical relationship between education and economic growth that has been found in the empirical macroeconomic literature. Conversely, for a given enrolment rate, the quality of education, as measured by work
    Keywords: Human Capital; Skills; Occupational Choice; Labor Productivity; Macroeconomic Analyses of Economic Development; One, Two, and Multisector Growth Models;
    JEL: J24 O11 O41
    Date: 2014
  4. By: Attinasi, Maria-Grazia; Klemm, Alexander
    Abstract: This paper looks at the impact of discretionary fiscal policy on economic growth for a sample of 18 EU countries over the period 1998-2011. The main novelty of this paper is the use, on the revenue side, of a dataset of fiscal measures based on the yield of actual legislative and budgetary measures, rather than approximations, such as changes in cyclically-adjusted variables. Using static and dynamic panel data techniques, we find that fiscal consolidation can be a drag on economic growth in the short-term, although some specific budget categories are not found to be statistically significant. In general, the results also indicate that expenditure-based adjustment tends to be less harmful than revenue-based adjustment. Among expenditure cuts, reductions in government investment and consumption are found to be growth reducing. Among revenues, indirect tax increases are found to have a particularly strong negative impact. Dynamic specifications suggest that consolidation reduces growth mainly in the year of fiscal adjustment, while future growth rates are affected only through the usual time persistence. Nonlinear specifications indicate that spreading out consolidation reduces the negative impact on growth, but only very slightly and in the absence of financial market pressures and/or fiscal sustainability considerations. Additionally, front-loading fiscal consolidation appears to be less detrimental for growth when it is based on expenditure cuts rather than tax increases JEL Classification: H20, H30, H50, C33
    Keywords: fiscal multipliers, fiscal policy and growth, panel data.
    Date: 2014–07
  5. By: Diego Comin (Dartmouth College); Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: We examine the extent to which financial market development impacts the diffusion of 16 major technologies, looking across 55 countries, from 1870 to 2000. We find that greater depth in financial markets leads to faster technology diffusion for more capital-intensive technologies, but only in periods closer to the invention of the technology. In fact, we find no differential effect of financial depth on the diffusion of capital-intensive technologies in the late stages of diffusion or in late adopters. Our results are consistent with a view that local financial markets play a critical role in facilitating the process of experimentation that is required for the initial commercialization of technologies. This evidence also points to an important mechanism relating financial market development to technology diffusion and economic growth.
    Keywords: banking, technology diffusion, experimentation, growth.
    Date: 2014–10

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