nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒10‒04
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Currency misalignments and economic growth: the foreign currency-denominated debt channel By Carl Grekou
  2. Risk Sharing and Growth in Small-Open Economies By Raouf Boucekkine; Giorgio Fabbri; Patrick A. Pintus
  3. A ’Jump’ in the Stochasticity of the Solow-Swan Growth Model. By Claude Diebolt; Tapas Mishra; Mamata Parhi
  4. Robust Determinants of Growth in Asian Developing Economies: A Bayesian Panel Data Model Averaging Approach By Roberto Leon-Gonzalez; Thanabalasingam Vinayagathasan
  5. Public expenditure in different education sectors and economic growth: The Indian experience By Ghosh Dastidar, Sayantan; Chatterji, Monojit
  6. Revisiting the Lucas Model By Bernhard Skritek; Jesus Crespo Cuaresma; Arkadii V. Kryazhimskii; Klaus Prettner; Alexia Prskawetz; Elena Rovenskaya

  1. By: Carl Grekou
    Abstract: The literature on the growth effects of currency misalignments, although prolific, revolves around two main axes: one the one hand, the export-oriented growth literature which attributes positive effects to undervaluations (competitiveness gains) and, on the other hand, the Washington Consensus view according to which any deviations from equilibrium hamper economic growth. In this paper, we show that there is no "one size fits all" relationship in this regard. Indeed, relying on a panel of 72 developing and emerging countries, we evidence the existence of a foreign currency-denominated debt channel through which misalignments impact growth. Compared to the "traditional" competitiveness channel, this channel works in the opposite direction. The paper therefore reconciles the two strands of the literature: undervaluations may have indeed a positive growth effect, but it is crucial to take into account the possible costs related to this undervaluation to have a clearer picture of the net total effect.
    Keywords: Currency misalignments; Economic growth; Foreign currency-denominated debt.
    JEL: F3 F43 C33 O11
    Date: 2015
  2. By: Raouf Boucekkine (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS); Giorgio Fabbri (Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESS); Patrick A. Pintus (Aix-Marseille Université (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: In this paper, we revisit the question of how domestic and foreign risks affect growth through the lens of an AK small-open economy model with risky borrowing/lending and global diversification. Wealth is allocated between domestic and foreign assets and the optimal allocation depends on both the difference in deterministic returns and the relative magnitude and correlation of domestic and foreign risks. Depending on parameters, the small-open economy may choose to either borrow from abroad, despite the fact that this is risky, or lend. In contrast to standard N-country models, whether growth is faster or slower (and whether growth is more or less volatile) compared to autarky is not entirely driven by relative risk aversion but also depends on the return and risk characteristics of domestic and foreign assets. We also show that growth volatility and mean growth have typically nonmonotonic relationships with the the levels and correlation of domestic and foreign risks. We argue that these results are in line with, and lay down some theoretical foundations for explaining the conflicting empirical results regarding the impact of international financial integration on growth and in particular threshold effects.
    Keywords: International Financial Integration, endogenous growth, small open economy, domestic and foreign risks
    JEL: F34 F43 O40
    Date: 2015–09–17
  3. By: Claude Diebolt; Tapas Mishra; Mamata Parhi
    Abstract: We characterize ’Solow-Swan’ economic growth model in a stochastic environment. Our interest basically lies in modelling arrival of uncommon or stochastic shocks in both physical capital and labour, introducing discontinuities in the growth of these variables. These characterizations are completed by employing a Jump process to the Solow-Swan model. Interesting dynamics of capital and labor growth emerge from our investigation.
    Keywords: Stochastic Solow-Swan growth, Brownian motion, Jump process.
    JEL: E13 C60 O41 L1 C1 D2
    Date: 2015
  4. By: Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies); Thanabalasingam Vinayagathasan (National Graduate Institute for Policy Studies)
    Abstract: This paper investigates the determinants of growth in the Asian developing economies. We use Bayesian model averaging (BMA) in the context of a dynamic panel data growth regression to overcome the uncertainty over the choice of control variables. In addition, we use a Bayesian algorithm to analyze a large number of competing models. Among the explanatory variables, we include a non-linear function of inflation that allows for threshold effects. We use an unbalanced panel data set of 27 Asian developing countries over the period 1980–2009. Our empirical evidence on the determinants of growth suggests that an economy’s investment ratio is positively correlated to growth, whereas government consumption expenditure and terms of trade are negatively correlated. We also find evidence of a nonlinear relationship between inflation and economic growth, that is, inflation impedes economic growth when it exceeds 5.43% but does not have any significant effect on growth below that level.
    Date: 2015–09
  5. By: Ghosh Dastidar, Sayantan; Chatterji, Monojit
    Abstract: The study examines the empirical relationship between public primary, secondary and tertiary education expenditure and economic growth of India using time series econometric analysis for the time period 1951-2011. The econometric analysis indicates that all the sectoral education expenditures positively affect GDP growth from 1980 onwards when the country started to shift from a state-led growth model towards a pro-business regime. We argue that the labour market characteristics and the institutional structure were responsible for the lack of effectiveness of education spending prior to 1980s. Before the 1980s, the public sector was the principal operator in the Indian economy, private sector participation was minimal and bureaucratic jobs were the most attractive jobs which were unproductive and highly rent-seeking. Such a situation discouraged proper utilisation of the skilled work force and hence the education expenditure did not exhibit the desired growth effects. With the onset of reforms, industrial and service sectors expanded creating more job opportunities and thus there was better utilisation of the educated labour pool. As a result, the effect of education expenditure started to be felt as the human capital was put to better use.
    Keywords: Education Expenditure, Primary Education, Secondary Education, Tertiary Education, Economic Growth, India
    JEL: H50 H52 O11 O47
    Date: 2015–09–24
  6. By: Bernhard Skritek (TU Wien); Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Arkadii V. Kryazhimskii (IIASA); Klaus Prettner (University of Hohenheim); Alexia Prskawetz (University of Hohenheim); Elena Rovenskaya (IIASA)
    Abstract: We revisit the influential economic growth model by Lucas (1988) ["On the mechanics of economic development." Journal of Monetary Economics, 22(1):3-42], assuming that households optimally allocate consumption and education over the life-cycle given an exogenous interest rate and exogenous wages. We show that in such a partial equilibrium setting, the original two-state (physical capital and human capital) optimization problem can be decomposed into two single-state optimal control models. This transformation allows us to rigorously prove the existence of a singular control describing the allocation of education time along a balanced growth path. We derive a constructive condition for a singular control to exist and show that under this condition infinitely many singular controls are optimal in the individual household problem. In contrast to the original general equilibrium framework in which an agent always chooses part-time education and part-time work, in our framework such an agent might find it optimal to allocate her whole available time to education at the beginning of her life and to focus on labor supply only when she is older.
    Keywords: Optimal lifetime education, optimal control, singular control, economic growth, human capital
    JEL: C60 O41 I20
    Date: 2015–09

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