nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒08‒01
five papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Financial deepening and economic growth: A System GMM Panel Analysis with application to 7 SSA countries By Alimi, R. Santos
  2. Finance, growth and human development: An Islamic economic development perspective By Uddin, Md. Akhter; Masih, Mansur
  3. Fiscal Episodes, Technological Progress and Market Power By António Afonso; João Tovar Jalles
  4. Relationship Banking, Shadow Banking, and the Economics of Depression By Bianco, Antonio
  5. Causality between financial development and economic growth, and the Islamic finance imperative: A case study of Indonesia By Ismail, Mohamed Ayaz Mohamed; Masih, Mansur

  1. By: Alimi, R. Santos
    Abstract: The relationship between financial development and economic growth has been a key study in economics field for a long time. This paper examines the link between financial development and economic growth in 7 Sub-Saharan African countries - Nigeria, South Africa, Lesotho, Malawi, Sierra Leone, Botswana and Kenya, over the period of 1981-2013. The study applied both static and dynamic panel data approach, to investigate the relation between financial development and economic growth. The results show that financial development has not led to economic growth in the panel of the selected countries when domestic credit provided by the banking sector is used as a proxy for financial development. The results thus lend support for the independent hypothesis postulates that financial development and economic growth are causally independent. Our study also considered foreign direct investment and interest rate as determinant of growth, but only interest rate suggested positive effect on economic growth. The implication of the results is that there is ardent need to develop the financial sector in order to stimulate real growth in the economies of these countries. Development of microfinance institutions as a complement to the conventional commercial banks will play a great role mobilising savings and providing ease access to fund, thus engendering growth process in the Sub-Saharan Africa.
    Keywords: Economic Growth; Financial Development; Generalized Method of Moments; Panel Data.
    JEL: G2 G21 O47
    Date: 2015–07
  2. By: Uddin, Md. Akhter; Masih, Mansur
    Abstract: In a growing body of literature, importance of financial sector development and growth on human development has been emphasized but so far little empirical evidence to support this. Islam is a progrowth religion but the concept of development in Islam is multidimensional, understanding the relationship between finance, growth and human development would help us better explain and develop a sustainable pro-Islamic economic growth model, which would help eradicate mass poverty, income inequality and develop human capital in the Muslim world. This study aims to investigate how finance and growth affect human development in Malaysia from Islamic economic development perspective by using standard time series technique, ARDL. The study finds that there is a long term relationship between finance, growth and human development. Human development is found significantly correlated with the growth in the long run. It can be argued that financial development supports growth and growth ultimately promotes human development in the long run, also, macroeconomic stability is found significant for sustainable economic growth in Malaysia. However, oil price is found not correlated with growth in the long run for the Malaysian economy.
    Keywords: economic growth, financial development, human development, ARDL
    JEL: C22 C58 E44
    Date: 2015–06–25
  3. By: António Afonso; João Tovar Jalles
    Abstract: We assess the impact of fiscal adjustments (and technology) on the evolution of markups in a panel of 14 OECD countries. We allow for smooth changes in the technological parameters by generating measures of TFP compatible with markups and assess the interaction between the two variables. Our results with narrative action-based data show counter-cyclicality since negative fiscal shocks increase markups. Moreover, in times of economic contraction the degree of counter-cyclicality of negative (positive) government spending (tax) shocks is larger than during economic expansions. In addition, markups have a pro-cyclical behaviour after a productivity shock. However, when identifying fiscal consolidations using changes of the cyclically adjusted primary balance, one obtains expansionary effects and a pro-cyclical behaviour in terms of markups and aggregate demand shocks.
    Keywords: imperfect competition, TFP, fiscal consolidation, local projection, business cycle, impulse response functions, GMM
    JEL: D4 E3 E6 H6
    Date: 2015–07
  4. By: Bianco, Antonio
    Abstract: A stock-flow consistent and simple methodological account of the influence of financial markets over the real economy is here presented. Based on an original interpretation of the basic heterogeneity in relationship and shadow banking operations, often referred to as OTH vs. OTD banking models, this methodological article develops an accounting model that emphasizes the interdependencies in entrepreneurs’ variations in animal spirits, financial institutions’ liquidity risk management, and households’ effective demand. The model captures the idea that fluctuations in the composition of property incomes lead to fluctuations in borrowing for non-financial purposes that, in their turn, drive fluctuations in spending. The model is so devised as to allow a tidy comparison in the role played by relationship or shadow banking over the dynamism of a depressed economy.
    Keywords: depression, animal spirits, liquidity preference, effective demand, post-Keynesian, endogenous money, securitization, relationship vs. shadow banking, originate-to-hold vs. originate-to-distribute
    JEL: B52 E12 E20 E44 M40
    Date: 2015–05
  5. By: Ismail, Mohamed Ayaz Mohamed; Masih, Mansur
    Abstract: Indonesia has been rapidly showing signs of advanced economic development. The country’s central bank is of the view that with the unbanked accounting for more than half of the population, the potential for growth in the world’s biggest Muslim population is immense. This article makes an attempt to test the possible directions of causality between financial development and economic growth, with Indonesia as a case study. It also discusses the results in the context of the development of Islamic finance in Indonesia. The study is conducted by applying the Autoregressive Distributed Lag model (ARDL) analysis (also known as the Bounds testing procedure) proposed by Pesaran et al. (2001). This article is believed to be one of the first to extend the finance-growth nexus discussion to include the development of Islamic finance. The study finds a unique cointegrating relationship among GDP per capita, gross fixed capital formation, annual population growth rate, and domestic credit to private sector. These findings have clear policy implications in that a policy of development and growth of the financial sector will help enhance economic growth, and will provide the necessary base from which Indonesia can significantly enhance its Islamic finance industry.
    Keywords: Financial Development, Economic Growth, Islamic Finance, ARDL Approach, Indonesia
    JEL: C22 C58 E44
    Date: 2015–07–18

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