nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒08‒25
seven papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Do R&D subsidies necessarily stimulate economic growth? By Chen, Ping-ho; Chu, Hsun; Lai, Ching-Chong
  2. When Should Public Debt Be Reduced? By Jonathan David Ostry; Atish R. Ghosh; Raphael A. Espinoza
  3. Financial Development, Institutions and Economic Growth: Evidence from Sub-Saharan Africa By Effiong, Ekpeno
  4. Fiscal consolidation in times of crisis: is the sooner really the better? By Christophe Blot; Marion Cochard; Jérôme Creel; Bruno Ducoudre; Danielle Schweisguth; Xavier Timbeau
  5. Real Exchange Rate and Economic Growth in China: A Cointegrated VAR Approach By Tang, Bo
  6. A Bayesian model comparison for trend-cycle decompositions of output By Joshua C.C. Chan; Angelia L. Grant
  7. Economic Shocks and their Effects on Unemployment in the Euro Area Periphery under the EMU By Pietro Dallari; Antonio Ribba

  1. By: Chen, Ping-ho; Chu, Hsun; Lai, Ching-Chong
    Abstract: This paper analyzes the growth effect of subsidy policies in a modified R&D-based growth model of Romer (1990), in which both innovation and capital accumulation are engines of long-run economic growth. We show that, under certain conditions, subsidizing the R&D sector may be growth-impeding.
    Keywords: R&D; subsidy policy; endogenous growth;
    JEL: H2 O3
    Date: 2015–08
  2. By: Jonathan David Ostry; Atish R. Ghosh; Raphael A. Espinoza
    Abstract: What considerations should guide public debt policy going forward? Should debt be reduced to achieve normative anchors (such as 60 percent of GDP), should it be increased further to finance a big public investment push, or should the existing debt be serviced forever? We argue that, for countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortive taxes merely to bring the debt down is a treatment cure that is worse than the disease. High public debt of course is costly, but it is a sunk cost only made worse by efforts to pay down the debt through distortionary taxation. Living with the debt is the welfare-maximizing policy. In decisions vis-à-vis the big push for public investment, golden-rule considerations remain salient, with due account taken of the additional servicing costs (and associated distortive taxation) from the resulting buildup of public debt.
    Keywords: Economic growth;Public investment;Public debt;debt, investment, financial crisis, Forecasts of Budgets, Deficits, and Debt,
    Date: 2015–06–02
  3. By: Effiong, Ekpeno
    Abstract: The paper investigates the effect of financial development on economic growth conditional on the level of institutional quality for a panel of 21 Sub-Saharan African countries for the period 1986-2010. A standard growth regression is estimated with linear interaction between financial development and institutional quality. Our findings indicate that financial development has not significantly contributed to SSA economic growth, contrary to the significant positive effect of institutional quality. The interaction effect of both financial and institutional development is positive but insignificant. This evidence suggest the existing institutions has not enhanced the finance-growth relationship in the region. Therefore, improving institutions relevant to the financial sector is desired.
    Keywords: Financial development, Institutions, Economic growth, Sub-Saharan Africa
    JEL: C23 G21 O16 O55
    Date: 2015–08
  4. By: Christophe Blot (OFCE - OFCE - Sciences Po); Marion Cochard (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Bruno Ducoudre (OFCE - OFCE - Sciences Po); Danielle Schweisguth (OFCE - OFCE - Sciences Po); Xavier Timbeau (OFCE - OFCE - Sciences Po)
    Abstract: Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP.
    Date: 2014–04
  5. By: Tang, Bo
    Abstract: This study investigates the relationship between the real exchange rate (RER) and economic growth in China applying a cointegrated VAR (CVAR) model. However, in contrast to the assumptions of trade partners, this paper finds that the Chinese economy has not benefited from the lower exchange rate of the RMB, and no direct linkages exist between the RER and growth in the long run. Interestingly, it appears that the Chinese economy is stimulated by the expansion of exports and inflow of foreign capital according to the empirical evidence, which also suggests that the long run equilibrium RER is jointly determined by the foreign trade, foreign reserves and the foreign direct investment. In addition, the 2005 RMB policy reform did not show any significant impact on the RER, but instead contributed to the steady economic growth. It is clear that, after the 2008 world crisis, the RMB exchange rates were largely dependent on the enhancing of the national strength and inflow of foreign capital, rather than the slow increase in foreign trade. As for policy implications, China may insist on the managed floating exchange rate policy making limited adjustments to the currency's daily floating range in response to the pressures from trade partners.
    Keywords: real exchange rate (RER), economic growth, CVAR, China
    JEL: C32 F31 F43 O24
    Date: 2014–11
  6. By: Joshua C.C. Chan; Angelia L. Grant
    Abstract: We compare a number of widely used trend-cycle decompositions of output in a formal Bayesian model comparison exercise. This is motivated by the often markedly different results from these decompositions—different decompositions have broad implications for the relative importance of real versus nominal shocks in explaining variations in output. Using US quarterly real GDP, we find that the overall best model is an unobserved components model with two features: 1) a nonzero correlation between trend and cycle innovations; 2) a break in output growth in 2007. Under this specification, annualized trend output growth decreases from about 3.4% to 1.5% after the break. The results also indicate that real shocks are more important than nominal shocks.
    Keywords: Bayesian model comparison, unobserved components, structural break, business cycle
    JEL: C11 C52 E32
    Date: 2015–08
  7. By: Pietro Dallari; Antonio Ribba
    Abstract: In this paper we aim to investigate the effects of several types of shocks on unemployment in peripheral European countries under the EMU. We use a structural near- VAR model to account for the supranational conduct of monetary policy on the one hand, and domestic fiscal policy and financial shocks on the other hand. Our main findings are: (i) the unemployment multipliers of government spending shocks are higher than the ones associated with government revenues shocks, and they vary across countries; (ii) instability in the unemployment responses over time is marked, with evidence that a regime shift took place in some countries since 2007; (iii) fiscal and financial shocks are not among the long-term drivers of unemployment, but instead a more important role is played by Euro area-wide shocks, with a pre-eminent role for the common monetary policy shock.
    Keywords: business cycles, unemployment, euro area, near-Structural VARs
    JEL: E32 E62 C32
    Date: 2015–07

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