nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒06‒27
eleven papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Productive Public Expenditure and Debt Dynamics: An Error Correction Representation using Indian Data. By Hakhu, Antra Bhatt
  2. Growth effect of FDI in developing economies: The role of institutional quality. By C. Jude; G. Levieuge
  3. The Impact of Political Competition on Economic Growth: Evidence from Municipalities in South Africa By Nonso Obikili
  4. Financialisation and the Financial and Economic Crises: The Case of Portugal By Sergio Lagoa; Emanuel Leao; Ricardo Paes Mamede; Ricardo Barradas
  5. Economic growth and debt: a simplified model By Krouglov, Alexei
  6. A Schumpeterian Growth Model with Financial Intermediaries By Miho Sunaga
  7. Financialisation and Economic and Financial Crises: The Case of Italy By Giampaolo Gabbi; Elisa Ticci; Pietro Vozzella
  8. An Inter-Country Analysis on Growth of Non-Bank Financial Intermediaries By K.R. Shanmugam
  9. Financialisation and the Financial and Economic Crises: The Case of Spain By Jesus Ferreiro; Catalina Galvez; Ana Gonzalez
  10. Flexible Transitional Dynamics in a Non-Scale Fully Endogenous Growth Model By Pedro Mazeda Gil; André Almeida,; Sofia B.S.D. Castro,
  11. Financialisation and the Financial and Economic Crises: The Case of Estonia By Egert Juuse; Rainer Kattel

  1. By: Hakhu, Antra Bhatt (Tata Institute of Social Sciences)
    Abstract: The paper aims to explore the dynamics between components of public expenditure and public debt using an intertemporal optimization framework based on Turnovsky (2007). Public expenditure is classified as `productive' and `less-productive' based on the rationale that a proportion of the productive public expenditure (phi) corrects disequilibrium in the public debt in the long-run. The `second-order' conditions resulting from the model demonstrate that as phi increases, the marginal social value of a unit of capital reduces. Thus, beyond its optimal level, an increase in phi could still affect public debt inversely; however, this will be at the cost of `crowding out' of private investment. To test the theoretical representation and to analyse the relationship between public expenditure and debt, an empirical analysis using Indian Public Finance data (1980-2013) is carried out in this study. Time series methods are employed to test the hypothesis that capital expenditure of the government is productive public expenditure. The correlation, cointegration and ECM results show that real capital expenditure is cointegrated with real public debt of the Central and the General government. Additionally, in the long run, real capital expenditure adjusts to bring real public debt on a convergent path. The amount of disequilibrium corrected is 0.01 and 0.035 for the Central and the Consolidated General Government respectively. Key policy implications point towards a scope for increasing public capital expenditure in the Indian economy while complementing it with private investment stimulus to stabilize public debt in the long run.
    Keywords: Public Debt ; Sustainability ; Public expenditure ; Dynamic Optimization
    JEL: H63 E62 C61
    Date: 2015–05
  2. By: C. Jude; G. Levieuge
    Abstract: This paper investigates the effect of FDI on economic growth conditional on the institutional quality of host countries. We first develop several theoretical arguments to show that institutional heterogeneity may be an explanation for the mixed results of previous empirical studies. Second, using a Panel Smooth Regression model on a large sample of developing countries, we show that FDI has a positive effect on growth only beyond a certain threshold of institutional quality. In order to benefit from FDI-led growth, institutional reforms should thus precede FDI attraction policies. Additionally, some reforms seem to promote faster marginal effects of FDI, while institutional complementarities may lead to an incremental effect on growth.
    Keywords: FDI, growth, heterogeneity, institutional quality, PSTR, Developing economies
    JEL: F21 C34 F43 O16
    Date: 2015
  3. By: Nonso Obikili
    Abstract: This paper examines the impact of political competition on economic growth. Using results from the 1994 and 1999 elections I show that municipalities with a decisive vote either for or against the dominant national party have grown faster than municipalities with more voter competition amongst various political parties. I show that in democracies, governments with more freedom to make decisions and less threat from opposition political parties are associated with faster economic growth and improvement in supply of some public goods.
    Keywords: Political Competition, economic growth, Democracy, Voting Behaviour
    JEL: P16 O47 D72
    Date: 2015
  4. By: Sergio Lagoa (Instituto Universitário de Lisboa – ISCTE and Dinamia’Cet-IUL); Emanuel Leao (Instituto Universitário de Lisboa – ISCTE and Dinamia’Cet-IUL); Ricardo Paes Mamede (Instituto Universitário de Lisboa – ISCTE and Dinamia’Cet-IUL); Ricardo Barradas (Instituto Universitário de Lisboa – ISCTE and Dinamia’Cet-IUL)
    Abstract: The notion of 'financialisation' broadly refers to the growing weight of finance in contemporary economies. Taking this into account, the present study focus on the long-run macroeconomic development and recent financial and economic crisis of the Portuguese economy. Contrary to Greece, Ireland, and Spain, the dismal performance of the Portuguese economy is not solely a post-subprime crisis phenomenon. The sharp discontinuity in GDP growth around the turn of the century is a distinctive feature of Portugal in the EU context and, although several factors account for this discontinuity, the process of financialisation of the Portuguese economy is an essential part of the explanation. This process in Portugal was essentially characterised by a large increase in bank credit to the private sector, resulting from a combination of demand- and supply-side factors that produced a wide availability of credit at historically low interest rates. Thus, we suggest that the Portuguese experience can be labelled a ‘debt-led domestic demand growth’ model. However, after 2000 the Portuguese economy experienced a succession of shocks, and an exhaustion of the domestic debt-led growth at a much earlier stage than other countries, resulting in a sharp economic slowdown, with negative consequences for public finances. The high levels of public and private indebtedness were a decisive factor behind the steep rise in the Portuguese sovereign bonds interest rates between 2010 and 2012. Finally, we assess the impact of financialisation in the current account, investment, consumption, and inequality; articulating these domains with the general growth model. Our conclusion is that the increase in the importance of finance ended having a clear negative impact on the three former domains, while the negative impact on income inequality was less pronounced.
    Keywords: Portugal, financialisation, credit, economic growth, investment, consumption, trade balance, income inequality, financial and economic crisis
    JEL: E00 G01 O11 O16 O52 P16
    Date: 2014–12–01
  5. By: Krouglov, Alexei
    Abstract: Presented is a mathematical model of single-product economy where an investment and debt are used to alter the demand for and supply of product. Explored is the dynamics of a nominal economic growth and decline. Examined are cases of a constant-rate growing debt and a constant-rate and constant-acceleration growing investment.
    Keywords: debt; investment; modeling
    JEL: E22 E32 E51
    Date: 2015–06–21
  6. By: Miho Sunaga (Graduate School of Economics, Osaka University)
    Abstract: This study introduces financial intermediaries into the Schumpeterian growth model developed by Aghion, Howitt, and Mayer-Foulkes (2005). They collect deposits from households, provide funds for entrepreneurial projects, and monitor the entrepreneurs. I consider an economy with moral hazard problems: entrepreneurs can hide the result of a successful innovation and thereby avoid repaying financial intermediaries if the latter do not monitor entrepreneurial performance. I analyze the effects of financial interme- diariesf activities on technological progress and economic growth in such an economy. I show that financial intermediaries need to monitor entrepreneurs in an economy where the legal protection of creditors is not strong enough. Such monitoring can resolve the moral hazard problem; however, it does not always promote technological innovation, because it could increase the cost of entrepreneurial innovation and thus reduce the amount invested for innovation. I also examine how monitoring by financial intermedi- aries affects the welfare of individuals through the stringency of financial markets.
    Keywords: conomic growth, Innovation, Financial intermediaries, Monitoring
    JEL: G21 O16 O41
    Date: 2015–06
  7. By: Giampaolo Gabbi (University of Siena); Elisa Ticci (University of Siena); Pietro Vozzella (University of Siena)
    Abstract: This report on Italy examines the long-run changes between the financial and the real sectors of the economy, with a focus on the effects of financialization on the macroeconomic developments which drove to the 2007 financial crisis. The first part provides some analysis on the major GDP components and the financial balance pattern over the long period. The analysis allows to classify the nature of Italian growth as mainly consumer led type. The second part finds out the effects of an increasing dominance of finance since the beginning of the 1990s on income distribution, investment in capital stock, consumption and the current account. The third part links the long-run developments with the financial and economic crisis, showing how the consumer collapse and the public investment constraints explain how the recession is still charactering the Italian economy.
    Keywords: income inequality, consumption, financialisation, financial and economic crisis, current account, credit, Italy
    JEL: D31 D33 E21 E24 E25 E62 E64 G21
    Date: 2014–12–01
  8. By: K.R. Shanmugam (Madras School of Economics)
    Abstract: Non-Bank Financial Institutions (NBFIs) or shadow banks are internationally recognized as financial intermediaries. There have been debates in the literature on the exact relation (complementary or substitutability) between non-banking and banking sectors and between financial sector development/liberalization and economic growth. This study analyzes these issues using the data from 25 major nations in the world during 2006-13 and panel data methodology. Results of the study suggest that (i) NBFIs hold nearly 22 percent of the total financial system assets; (ii) both credit risk and funding risk associated with interconnectedness between banks and non-banks sectors was larger for NBFIs than for banks in almost all nations; (iii) banks and Non-banking institutions are competing each other; (iv) financial sector represented by banking sector plays a significant role in determining GDP growth of nations, thereby confirming the Schumpeterian idea of finance spurring growth and (v) the economic growth and non-banking sectors growth are positively related, supporting the Robinsonian conjecture of economic growth leading to more dynamic financial sector development. The NBFI regulation is generally underdeveloped in almost all countries. The most nations do not have policy instruments that are specially designed for dealing with systemic risks associated with NBFIs. A perpetual challenge for financial regulators and supervisors in various nations is to choose appropriate regulatory mechanism suited to their countries.
    Keywords: Non-Bank Financial Sector, Regulation, Systemic Risk, Global Economies
    JEL: E44 G21
    Date: 2015–04
  9. By: Jesus Ferreiro (Department of Applied Economics V, University of the Basque Country UPV/EHU); Catalina Galvez (Department of Applied Economics V, University of the Basque Country UPV/EHU); Ana Gonzalez (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: The aim of this paper is to analyse the relationship between the financial crisis and the real economic crisis in Spain. The main central hypothesis put forward by this study is that financialisation, which lies at the root of the financial crisis both in Spain and in other European and advanced economies, has also implied changes in the real and financial behaviour of private (i.e., households, non-financial corporations and financial corporations) and public agents that explain the extent and prolonged duration of the crisis in Spain.
    Keywords: Financialisation, models of growth, consumption, investment, financial balance sheets, income distribution
    JEL: E44 G21 O52
    Date: 2014–12–01
  10. By: Pedro Mazeda Gil (University of Porto, Faculty of Economics, and cef.up); André Almeida, (University of Porto, Faculty of Economics); Sofia B.S.D. Castro, (University of Porto, Faculty of Economics, and CMUP)
    Abstract: This paper develops a non-scale growth model of physical capital accumulation and two types of lab-equipment R&D, where both the intensive and extensive margins of growth are fully endogenous. We study analytically the long-run equilibrium stability and transitional dynamics properties of the model, and establish meaningful sufficient conditions for saddle-path stability. We relate the different combinations of initial conditions of the dynamical system with the observation of monotonic versus non-monotonic transitional dynamics. Our model is able to predict monotonic, hump-shaped and inverted hump-shaped trajectories, therefore encompassing the evidence reported by the empirical literature for distinct subsets of countries.
    Keywords: Keywords: endogenous growth, non-monotonic transitional dynamics, R&D, lab equipment, physical capital
    JEL: O41 O31
    Date: 2015–06
  11. By: Egert Juuse (Tallinn University of Technology (TTU), Estonia); Rainer Kattel (Tallinn University of Technology (TTU), Estonia)
    Abstract: This study on Estonia examines the long-run changes between the financial and the non-financial sectors of the economy, and in particular the effects of financialisation on key variables / categories of the real economy as well as the their contribution to the financial crisis of 2007/08. The first part provides the background historical overview of last 20 years in Estonia with some descriptive statistics on GDP, growth contributions of the main demand aggregates, and the financial balances of the macroeconomic sectors since early 1990s, and it classifies the Estonian development path as following the ‘debt-led consumption’ one. The following chapters examine the effects of financialisation and their extent, accompanied by transition processes, on income distribution, financing of capital stock investments, consumption and current account dynamics in detail. The final parts deal with the elaboration on the causes of the financial and economic crisis as well as the policy response in Estonia.
    Keywords: current account balance, trade balance, income distribution, finance-dominated capitalism, transition economies, financialisation, financial and economic crisis, Estonia.
    JEL: D31 D33 D43 E25 E61 E64 E65 F40 F43 P20 P21 R21
    Date: 2014–12–01

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