nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒01‒26
three papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Public debt, economic growth and public sector management in developing countries: is there a link? By Megersa, Kelbesa; Cassimon, Danny
  2. Post-Crisis Slow Recovery and Monetary Policy By Daisuke Ikeda; Takushi Kurozumi
  3. Skill-Structure Shocks, the Share of the High-Tech Sector and Economic Growth Dynamics By Pedro Mazeda Gil; Oscar Afonso; Paulo B. Vasconcelos

  1. By: Megersa, Kelbesa; Cassimon, Danny
    Abstract: The paper investigates whether differences in public sector management quality affect the link between public debt and economic growth in developing countries. For this purpose, we primarily use World Bank’s institutional indices of public sector management (PSM). Using PSM thresholds, we split our panel into country clusters and make comparisons. Our linear baseline regressions reveal a significant negative relationship between public debt and growth. The various robustness exercises that we perform also confirm these results. When we dissect our dataset into ‘weak’ and ‘strong’ county clusters using public sector management scores, however, we find different results. While public debt still displayed a negative relationship with growth in countries with ‘weak’ public sector management quality, it generally displayed a positive relationship in the latter group. The tests for non-linearity shows evidence of an ‘inverse-U’ shape relationship between public debt and economic growth. However, we fail to see a similar significant relationship on country clusters that account for PSM quality. Yet, countries with well managed public sectors demonstrate a higher public debt sustainability threshold.
    Keywords: public debt, economic growth, public sector management, developing countries
    JEL: E62 F34 H63 H83 O11
    Date: 2014–12
  2. By: Daisuke Ikeda (Institute for Monetary and Economic Studies, Bank of Japan.); Takushi Kurozumi (Institute for Monetary and Economic Studies, Bank of Japan.)
    Abstract: In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed and slowdowns in total factor productivity (TFP) growth have been measured in many economies. This paper develops a model that can describe a slow recovery resulting from an adverse financial shock in the presence of an endogenous mechanism of TFP growth, and examines how monetary policy should react to the financial shock in terms of social welfare. It is shown that in the face of the financial shocks, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much more substantial than in the model where TFP growth is exogenously given. Moreover, compared with the welfare-maximizing rule, a strict inflation or price-level targeting rule induces a sizable welfare loss because it has no response to output, whereas a nominal GDP growth or level targeting rule performs well, although it causes high interest-rate volatility. In the presence of the endogenous TFP growth mechanism, it is crucial to take into account a welfare loss from a permanent decline in consumption caused by a slowdown in TFP growth.
    Keywords: Financial shock; Endogenous TFP growth; Slow recovery; Monetary policy; Welfare cost of business cycle
    JEL: E52 O33
    Date: 2014–12
  3. By: Pedro Mazeda Gil (Faculdade de Economia, Universidade do Porto); Oscar Afonso (Faculdade de Economia, Universidade do Porto); Paulo B. Vasconcelos (Faculdade de Economia, Universidade do Porto)
    Abstract: By means of an endogenous growth model of directed technical change with vertical and horizontal R&D, we study a transitional-dynamics mechanism that is consistent with the changes in the share of the high- versus the low-tech sectors found in recent European data. Under the hypothesis of a positive shock in the proportion of high-skilled labour, the technological-knowledge bias channel leads to nonbalanced sectoral growth with a noticeable shift of resources across sectors. A simple calibration exercise suggests that, under prevailing market-scale effects, the model is able to account for up to 50 to 100 percent of the increase in the share of the high-tech sector observed in the data from 1995 to 2007. However, the model predicts that the dynamics of the share of the high-tech sector has no significant impact on the economic growth rate.
    Keywords: industry dynamics, high tech, low tech, directed technical change, economic growth
    JEL: O41 O31
    Date: 2015–01

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