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

  1. Financial sector development and threshold effect of inflation in ECOWAS and SADC: A Panel smooth transition regression approach By Sulemana Mahawiya
  2. Endogeneity and Panel Data in Growth Regressions: A Bayesian Model Averaging Approach By Roberto Leon-Gonzalez; Daniel Montolio
  3. On the Empirics of Institutions and Quality of Growth: Evidence for Developing Countries By Simplice Asongu; Oasis Kodila-Tedika
  4. Finite Lifetimes, Population, and Growth By Bharat Diwakar; Gilad Sorek
  5. Transition and capital misallocation : the Chinese case By Damien Cubizol

  1. By: Sulemana Mahawiya
    Abstract: The financial sector of an economy is now widely agreed to constitute a potential important channel for growth. Many regions such as Sub-Saharan Africa, however, have relatively underdeveloped financial sector. Although several policy designs have been used to induce growth in the sector, there has been little or no success in the majority of the countries in the region. Existing theories suggest that inflation has negative effects on financial development. Other theories argue that inflation has a threshold effects on financial development. In this study, we provide a comparative study on the threshold effects of inflation on financial development between the Economic Community of West African States (ECOWAS) and the Southern Africa Development Community (SADC) for the period 1980-2011 using a novel Panel Smooth Transition Regression. Our results suggest evidence of the existence of a robust single threshold of inflation in both regions. Particularly, it indicates 17.9% and 14.5% of inflation for ECOWAS and SADC respectively, suggesting that inflation above these thresholds presents statistically significant detrimental effects for financial development in both regions. The study therefore argues that price stability policies with inflation targeting framework should be the primary objective in monetary policy, since high inflation is economically costly to financial development of the two regions.
    Keywords: ECOWAS, SADC, financial development, Inflation, Panel Smooth Transition regression, threshold effects
    JEL: G21 O16 O43 O55
    Date: 2015
  2. By: Roberto Leon-Gonzalez (National Graduate Institute for Policy Studies); Daniel Montolio (University of Barcelona, Facultat d'Economia i Empresa, Spain; Barcelona Institute of Economics (IEB))
    Abstract: Bayesian model averaging (BMA) has been successfully applied in the empirical growth literature as a way to overcome the sensitivity of results to different model specifications. In this paper, we develop a BMA technique to analyze panel data models with fixed effects that differ in the set of instruments, exogeneity restrictions, or the set of explanatory variables in the regression. The large model space that typically arises can be effectively analyzed using a Markov Chain Monte Carlo algorithm. We apply our technique to investigate the effect of foreign aid on per capita GDP growth. We show that BMA is an effective tool for the analysis of panel data growth regressions in cases where the number of models is large and results are sensitive to model assumptions.
    Date: 2015–10
  3. By: Simplice Asongu (Yaoundé/Cameroun); Oasis Kodila-Tedika (University of Kinshasa)
    Abstract: We explore a newly available dataset on quality of growth to investigate the effect of institutions on growth quality in 93 developing countries for the period 1990 to 2011. Quality of institutions is measured in term of political risk. The empirical evidence is based on: (i) Ordinary Least Squares (OLS) and Two Stage Least Squares (2SLS) and (ii) cross-sectional and panel data structures. In order to avail room for more policy implications, the dataset is further disaggregated into income levels, namely: Lower middle income (LMIC), low income (LI) and upper middle income (UMIC). Three main findings are established. First, institutions are positively related to the quality of growth. Second, institutions have significantly contributed to growth quality in increasing order during the following time intervals: 2005-2011, 1995-1999 and 2000-2004. Third, the positive nexus between institutions and growth quality is fundamentally driven by LMIC. Policy implications are discussed.
    Keywords: Quality of growth; Institutions; Social indicators
    JEL: O40 O55 I10
    Date: 2015–10
  4. By: Bharat Diwakar; Gilad Sorek
    Abstract: This work highlights principle differences in the predictions of R&D-based growth theory derived from the infinite horizon framework and the Overlapping Generations (OLG) framework of finitely living agents. In particular we show that the counterfactual positive effect of population growth on output growth presented in the second and third generation R&D-based growth models is eliminated in the corresponding OLG framework with finitely living agents. These differences arise because of the limiting effect of labor income on saving that presents only in the OLG framework. Our results indicate that the counterfactual relations between population and output growth rates presented in current R&D-based growth models are driven by their specific demographic structure.
    Keywords: R&D, Growth; Population; Overlapping Generations
    JEL: O31 O40
    Date: 2015–09
  5. By: Damien Cubizol (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon Saint-Etienne, Ecully, F-69130, France; Université Lyon 2, Lyon, F-69007, France)
    Abstract: This paper addresses the allocation puzzle of capital flows and privatization in emerging countries in transition. It demonstrates that the allocation of household savings to State-Owned Enterprises (SOEs), and not to the increasing share of private firms, solves both the allocation puzzle of capital flows and the drop in consumption in China. The contribution is to explain these two elements in a dynamic general equilibrium model with TFP growth that differentiates FDI and financial capital. In addition to other frictions, public banks and SOEs have the crucial role in capital misallocation by misdirecting household savings. It modifies firms’ labor and capital intensiveness, creates shifts in savings accumulation, and households satisfy the large cheap labor demand coupled with low returns on their savings. With a calibration adapted to the Chinese case and deterministic shocks, the model also matches to a large extent the data for a variety of stylized facts over the last 30 years.
    Keywords: Financial capital flows, FDI, China's transition, privatization, global imbalances, consumption, credit and capital markets frictions, TFP growth
    JEL: E20 F21 F32 P30
    Date: 2015

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