nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒03‒22
four papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Public Capital Expenditure and Debt Dynamics: Evidence from the European Union By Bhatt Hakhu, Antra; Piergallini, Alessandro; Scaramozzino, Pasquale
  2. Effect of bank capital requirements on economic growth By Natalya Martynova
  3. Financial Development, Environmental Quality, Trade and Economic Growth: What Causes What in MENA Countries By Omri, Anis; Daly, Saida; Rault, Christophe; Chaibi, Anissa
  4. Finance-growth nexus: insights from an application of threshold regression model to Malaysia’s dual financial system By Alaaabed, Alaa; Masih, Mansur

  1. By: Bhatt Hakhu, Antra; Piergallini, Alessandro; Scaramozzino, Pasquale
    Abstract: This paper investigates the relationship between public capital expenditure and public debt in the European Union (EU) on a panel of fifteen countries over the sample period 1980-2013. We find robust evidence of a negative cointegrating relation, according to which increases in the capital expenditure-GDP ratio cause reductions in the debt-GDP ratio in the long run. Our empirical results suggest that current EU fiscal austerity can trigger upward debt spirals if cuts in total expenditure disregard its composition. Consistently with the “golden rule of public finance”, EU fiscal rules should allow for higher levels of capital expenditure in order to foster debt consolidation through growth dividends.
    Keywords: Fiscal sustainability, EU, panel cointegration, public expenditure, public debt.
    JEL: C23 E62 H62 H63
    Date: 2014
  2. By: Natalya Martynova
    Abstract: This paper reviews studies exploring how higher bank capital requirements affect economic growth. There is little evidence of a direct effect; research focuses on the indirect effects of capital requirements on credit supply, bank asset risk, and cost of bank capital, which in turn can affect economic growth. Banks facing higher capital requirements can reduce credit supply as well as decrease credit demand by raising lending rates which may slow down economic growth. However, having better-capitalized banks enhances financial stability by reducing bank risk-taking incentives and increasing banks' buffers against losses.
    Keywords: bank capital requirement; credit growth; financial stability; economic growth; cost of equity
    JEL: G21 G28
    Date: 2015–03
  3. By: Omri, Anis (University of Sfax); Daly, Saida (University of Sfax); Rault, Christophe (University of Orléans); Chaibi, Anissa (IPAG Business School)
    Abstract: This paper examines the relationship between financial development, CO2 emissions, trade and economic growth using simultaneous-equation panel data models for a panel of 12 MENA countries over the period 1990-2011. Our results indicate that there is evidence of bidirectional causality between CO2 emissions and economic growth. Economic growth and trade openness are interrelated i.e. bidirectional causality. Feedback hypothesis is validated between trade openness and financial development. Neutrality hypothesis is identified between CO2 emissions and financial development. Unidirectional causality running from financial development to economic growth and from trade openness to CO2 emissions is identified. Our empirical results also verified the existence of environmental Kuznets curve. These empirical insights are of particular interest to policymakers as they help build sound economic policies to sustain economic development and to improve the environmental quality.
    Keywords: financial development, CO2 emissions, trade, economic growth, simultaneous-equation models
    JEL: E44 E58 F36 P26
    Date: 2015–02
  4. By: Alaaabed, Alaa; Masih, Mansur
    Abstract: The purpose of this paper is to test the growing converging views regarding the destabilizing and growthhalting impact of interest-based debt financial system. The views are as advocated by the followers of Keynes and Hyman Minsky and those of Islam. Islam discourages interest rate based debt financing as it considers that it is not conducive to productive activities and to human solidarity. Likewise, since the onset of the crisis of 2007/2008, calls by skeptics of mainstream capitalism has been renewed, to reconsider the dynamics of the prevailing financial system with emphasis on its untamed credit-creating capacity and link (or rather delink) to real sector transactions. The paper applies a threshold regression model to Malaysian data and finds that the relationship between growth and financial development is non-linear. A threshold is estimated, after which credit expansion negatively impacts GDP growth. While the post-threshold negative relationship is found to be statistically significant, the estimated positive relationship at lower levels of financial development is insignificant. The findings are hoped to provide insights to monetary authorities for better growth-promoting policy-making..
    Keywords: Credit, Financialization, Growth, Threshold Regression Model, Islamic Perspective
    JEL: C22 C58 E44
    Date: 2014–06–20

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