nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒05‒16
thirteen papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Economic growth and capital flow in European countries in pre and post-crisis periods. By Ketenci, Natalya
  2. “On the bi-directional causal relationship between public debt and economic growth in EMU countries” By Marta Gómez-Puig; Simón Sosvilla-Rivero
  3. Ideas, increasing return to scale, and economic growth: an application for Iran By Farhidi, Faraz; Isfahani, Rahim; Emadzadeh, Mostafa
  4. Exports, imports, FDI and GDP in Mexico By José Romero
  5. Explaining the Relationship between Public Expenditure and Economic Growth in Kenya using Vector Error Correction Model (VECM) By CHRISTINE SIMIYU
  7. Did banks and financial markets developments lead to economic growth in MENA region? Evidence from Dynamic panel data estimation By Hamdi, Helmi; Hakimi, Abdelaziz
  8. Education and Fertility: Panel Evidence from sub-Saharan Africa By Carolyn Chisadza; Manoel Bittencourt
  9. Optimal Taxation and Productive Social Expenditure By Thomas Bassetti; Luciano Greco
  10. The Facts of Economic Growth By Charles I. Jones
  11. Is the Maastricht debt limit safe enough for Slovakia? By Zuzana Mucka
  12. The Dynamics of Business Investment Following Banking Crises and Normal Recessions By Nils Jannsen
  13. Real effects of sovereign bond market spillovers in the euro area By Gadatsch, Niklas

  1. By: Ketenci, Natalya
    Abstract: A lot of attention in the literature has been given to an important issue of the effect of capital mobility on economic growth of developing countries and little attention has been devoted to developed countries. Developed countries are main players in the global financial market. Lately, increasing number of financial crises had negative effect not only on developing countries but on developed countries as well. Particularly the global financial crisis of 2008 had a negative impact on advanced economies. This paper investigates the relationship between economic growth and international capital flows in the EU members before and after the global financial crisis. The study examines how these relationships change when countries in the considered panel vary. Panel estimations using annual data for the period 1995-2013 are made for different groups of European countries, such as EU27, EU15, Eurozone and CEE members of EU. A dynamic panel data applies the Generalized Method of Moments estimation technique, developed by Hansen (1982). Empirical results reveal that relationships between economic growth and capital flows significantly vary between considered groups. This study finds evidence that after the global financial crisis, economic growth in EU15 and Eurozone groups became more sensitive to capital flows compared to the pre-crisis period.
    Keywords: Economic growth, capital flows, generalized method of moments (GMM), EU, dynamic panel data.
    JEL: F43
    Date: 2015–05–03
  2. By: Marta Gómez-Puig (Faculty of Economics, University of Barcelona); Simón Sosvilla-Rivero (Universidad Complutense de Madrid)
    Abstract: New evidence is presented on the possible existence of bi-directional causal relationships between public debt and economic growth in both central and peripheral countries of the European Economic and Monetary Union. We test for heterogeneity in the bi-directional Granger-causality across both time and space during the period between 1980 and 2013. The results suggest evidence of a “diabolic loop” between low economic growth and high public debt levels in Spain after 2009. For Belgium, Greece, Italy and the Netherlands debt has a negative effect over growth from an endogenously determined breakpoint and above a debt threshold ranging from 56% to 103% depending on the country.
    Keywords: Public debt, economic growth, Granger-causality, euro area, peripheral EMU countries, central EMU countries. JEL classification:C22, F33, H63, O40, O52
    Date: 2015–05
  3. By: Farhidi, Faraz; Isfahani, Rahim; Emadzadeh, Mostafa
    Abstract: Iran has experienced an increasing rate of economic growth during recent years. We need to explain the causes of this growth if we are to help maintain it. In this study, we try to calibrate and apply a model in the context of new growth models, based on Ideas derived from the Iranian economy. The results show that an increase in education levels and expansion in research activities are the main factors promoting economic growth in Iran during the studied period.
    Keywords: Economic growth, Ideas, Nonrivalry, Technological progress, Population growth
    JEL: O41 Q55 Q56
    Date: 2015–03
  4. By: José Romero (El Colegio de Mexico)
    Abstract: This paper studies the impact of trade liberalization on economic growth for Mexico. A four-variable vector autoregression (VAR) is used to study the relationships between trade, FDI and economic growth using quarterly data from 1989 to 2013. The estimated results from the Granger causality/Block exogeneity test show that economic growth is affected by real non-oil exports, real imports and real foreign direct investment. There is only one bidirectional causality, that between GDP an FDI, and two additional one-way causalities, one between FDI and imports and one between imports and non-oil exports. Thus the system is circular: all variables directly or indirectly affect each other. The Impulse Response Functions and Variance Decomposition show that non-oil exports and FDI have little or no impact on GDP, not supporting the growth-led hypothesis or the one that postulates that FDI promotes growth; nor do we find that GDP has a significant effect on non-oil exports, rejecting the hypothesis that growth induces exports. Finally we find that imports have a significant effect on GDP, supporting the import-compression hypothesis.
    Keywords: trade liberalization, economic growth, Mexico, FDI, GDP
    Date: 2015–02
    Abstract: The rapid growth in public expenditure in Kenya since independence has caused concern among policy makers on its implication on economic growth. The main aim of this study therefore was to explain the relationship between economic growth and public expenditure on Health, Education, Military and Infrastructure in Kenya. The study used a time series data collected between 1963 - 2012. Johansen Cointegration Test and Vector Error Correction Model (VECM) was applied on the time series data to estimate the short-run and long-run relationships between public expenditures and economic growth in Kenya. The results suggests that public expenditure components and economic growth co-move towards a long run equilibrium with a speed of adjustments of approximately 3.6% after short run fluctuations in the equilibrium. Furthermore, the results show no casual relationship between public expenditure and economic growth in Kenya. However, there exist a unidirectional causation between Military and Health expenditures - Military expenditures "Granger Cause" Health expenditures. Hence, a change in Military expenditures cause a change in Health expenditures. These findings suggests that the Government of Kenya switch military expenditures for health expenses in Kenya, but not vice versa.
    Keywords: Vector Error Correction Model (VECM), Granger Causation, Public expenditures, Economic Growth, Kenya.
    JEL: H50 O47 O55
  6. By: Giuseppe Di Liddo (University of Salento); Cosimo Magazzino (University of Roma Tre); Francesco Porcelli (University of Exeter)
    Abstract: The aim of this study is to empirically assess the existence of the BARS curve (Barro, Armey, Rahn, and Scully), as well as the relationship between public expenditure and decentralization, for Italian regions in the 1997-2009 period. Using panel data methodologies, we inspect the nexus between Regional government size (measured by the share of public expenditure on GDP) and the economic growth rate. The main results are twofold. First, when the degree of decentralization is reasonably low (below the 31% of expenditure decentralization), a BARS curve has been successfully discovered, and the optimal government size remains almost constant, assuming a value close to the 52%. The second one concerns the fact that, even though the optimal government size is almost constant, decentralization has a positive effect on economic activity. Finally, decentralization attenuates the negative impact of sub-optimal expenditure policy on growth process. Therefore, our results suggest that decentralization exerts a positive impact on public sector efficiency, contributing to stimulate the income growth.
    Keywords: BARS curve, decentralization, Italian Regions, public expenditure, economic growth, panel data
    JEL: H11 H50 H77 O43 R10 R50
    Date: 2015
  7. By: Hamdi, Helmi; Hakimi, Abdelaziz
    Abstract: This study examines the consequences of banks and stock markets developments on economic growth for eleven Middle Eastern and North African (MENA) countries for the period from 1995 to 2010. We perform dynamic panel data estimation and we use GMM estimator as suggested by Arellano and Bond (1991). The overall results suggest a positive relationship between banking and financial developments and economic growth. The results reveal that stock markets in MENA countries are still at an early stage of development and the sector needs the implementation of deep policy reforms to attract investors and to promote the contribution of the financial market in economic development.
    Keywords: Financial development, Economic growth, MENA, Dynamic Panel Data
    JEL: E44 G20 O16
    Date: 2015–05–12
  8. By: Carolyn Chisadza (Department of Economics, University of Pretoria); Manoel Bittencourt (Department of Economics, University of Pretoria)
    Abstract: We study the effects of different levels of education on fertility in 48 sub-Saharan African countries between 1970 and 2010. The results, based on panel data analysis with fi?xed effects and instrumental variables, show how that lower education levels do not have a significant effect on people?s fertility decisions. However, the results from the higher education levels suggest otherwise. They are indicative of a region that is transitioning from the Malthusian epoch to a modern growth regime in which people substitute quantity for quality of children. Lower fertility implies less strain on public expenditure, higher human capital and higher productivity which can lead to sustained economic growth as witnessed in most developed regions today.
    Keywords: education, fertility, sub-Saharan Africa
    JEL: O55 J13 I25
    Date: 2015–05
  9. By: Thomas Bassetti (University of Padova); Luciano Greco (University of Padova)
    Abstract: This paper characterizes the optimal tax and expenditure policies in economies where households’ unobservable gross earnings depend on exogenous (or inherited) capabilities and input investments. In a two-class economy, optimal redistribution relies on non-linear income taxation and input public provision only if the poor households demand less input than the rich. In a multi-class economy, optimal redistribution is implemented by usual-shape, non-linear income taxation and uniform public provision of input, if inherited capability and input are economic substitutes. But, when capability and input are complements, optimal redistribution relies only on non-linear income taxation. Numerical analyses show that, when individual productivity is separable in input and capability, these factors are economic substitutes (or complements) if preferences take into account (or not) the income effects.
    Keywords: In-kind redistribution; Non-linear income tax; Public provision of private goods; Opting out; Topping up; Numerical simulations
    JEL: H42 H21
    Date: 2015–04
  10. By: Charles I. Jones
    Abstract: Why are people in the richest countries of the world so much richer today than 100 years ago? And why are some countries so much richer than others? Questions such as these define the field of economic growth. This paper documents the facts that underlie these questions. How much richer are we today than 100 years ago, and how large are the income gaps between countries? The purpose of the paper is to provide an encyclopedia of the fundamental facts of economic growth upon which our theories are built, gathering them together in one place and updating the facts with the latest available data.
    JEL: E0 O4
    Date: 2015–05
  11. By: Zuzana Mucka (Council for Budget Responsibility)
    Abstract: We study the interactions among fiscal policy, fiscal limits and sovereign risk premia. The fiscal limit, which measures the government’s ability to service its debt, arises endogenously from dynamic Laffer curves and is a random variable. A nonlinear relationship between sovereign risk premia and the level of government debt then emerges in equilibrium. The model is calibrated to Slovak data and we study the impact of various model parameters on the distribution of the fiscal limit. Fiscal limit distributions obtained via Markov–Chain–Monte–Carlo regime switching algorithm depend on the rate of growth of government transfers, the degree of countercyclicality of policy, and the distribution of the underlying economic conditions. We find that it is considerably more heavy–tailed compared with the one usually obtained in the literature for advanced economies, and is very sensitive to the size and rate of growth of transfers. The main policy message is that the Maastricht debt limit is not safe enough for Slovakia: although in the equilibrium the chance of country default is 10 percent when the debt is 60 percent of GDP, it increases dramatically to approximately 40 percent in bad times (when productivity falls by almost 8 percent). A well-designed fiscal policy involving a deceleration in the growth of transfers can reduce the chance of default significantly.
    Keywords: Simulation Methods and Modelling, Fiscal Policy, Government Expenditures, Debt Management and Sovereign Debt
    JEL: C15 C63 E62 H5 H63
    Date: 2015–02
  12. By: Nils Jannsen
    Abstract: I empirically analyze the dynamics of business investment following normal recessions (declines in business investment that are not associated with banking crises) and banking crises. Using a panel of 16 advanced economies, I find evidence for significant non-linear trend reversion or bounce-back effects on the level of business investment following normal recessions, i.e., the deeper the previous recession was, the higher the growth rate of business investment will be. The trend reversion effect is absent when a decline in business investment is associated with a banking crisis. As a consequence, normal recessions do not have significant permanent effects on the level of business investment, whereas banking crises have large and significant permanent effects. The results are in line with important theories and other empirical results on business cycle dynamics
    Keywords: Business investment, business cycle, recovery, banking crises, asymmetries
    JEL: E32 C33
    Date: 2015–04
  13. By: Gadatsch, Niklas
    Abstract: This paper develops a small open economy model to investigate the impact of rising sovereign bond market spreads on the real economy. One key element of the model is a "sovereign risk channel" through which tensions in the sovereign bond market tend to spill over into private credit markets. The model is estimated with Bayesian methods and data for "high-spread" countries in the euro area. It turns out that spread shocks during the Euro crisis had a negative effect on real GDP growth in these countries, up to 0.8 percentage points (PP) Portugal and Ireland, 0.3 PP in Italy and 0.2 PP in Spain.
    Keywords: Small open economy,Business cycles,Sovereign risk premium,DSGE modeling
    JEL: E32 E43 F41
    Date: 2015

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