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on Financial Development and Growth |
| By: | William R. Cline (Peterson Institute for International Economics) |
| Abstract: | This paper evaluates recent findings by researchers at the Organization for Economic Cooperation and Development (OECD) on "too much finance." It first critiques the OECD findings, which seem to imply that the optimal amount of finance is zero, given the linear specification of the main tests. It then finds that the negative impact of additional finance on growth is reversed when the appropriate (purchasing-power-parity) per capita income is applied and country fixed effects are removed. Separate tests for countries with intermediated finance below and above 60 percent of GDP show a significant positive effect of finance on growth in the lower group but an insignificant effect in the higher group. An appendix replies to critics of my earlier study (Cline 2015b) in which I argued that an estimated negative quadratic effect of finance on growth was likely to be a spurious correlation reflecting convergence-based lower growth at higher per capita incomes. It notes that the critics' own logarithmic tests, yielding a positive marginal impact of finance on growth even at high levels, achieve comparable explanation to their quadratic form yielding a negative marginal impact. It finds that adding dummy variables for below and above intermediate financial depth to the logarithmic form does not support the inverse U influence found in the quadratic form. |
| Keywords: | financial depth, too much finance, cross-country growth, private credit, convergence |
| JEL: | G10 O16 O43 O47 O57 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp15-16&r=fdg |
| By: | Josh Ryan-Collins |
| Abstract: | Historically high levels of private and public debt coupled with already very low short-term interest rates appear to limit the options for stimulative monetary policy in many advanced economies today. One option that has not yet been considered is monetary financing by central banks to boost demand and/or relieve debt burdens. We find little empirical evidence to support the standard objection to such policies: that they will lead to uncontrollable inflation. Theoretical models of inflationary monetary financing rest upon inaccurate conceptions of the modern endogenous money creation process. This paper presents a counter-example in the activities of the Bank of Canada during the period 1935-75, when, working with the government, it engaged in significant direct or indirect monetary financing to support fiscal expansion, economic growth, and industrialization. An institutional case study of the period, complemented by a general-to-specific econometric analysis, finds no support for a relationship between monetary financing and inflation. The findings lend support to recent calls for explicit monetary financing to boost highly indebted economies and a more general rethink of the dominant New Macroeconomic Consensus policy framework that prohibits monetary financing. |
| Keywords: | Monetary Policy; Monetary Financing; Inflation; Central Bank Independence; Fiscal Policy; Debt; Credit Creation |
| JEL: | B22 B25 E02 E12 E31 E42 E51 E52 E58 E63 N12 N22 O43 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_848&r=fdg |
| By: | BLINOV, Sergey |
| Abstract: | People recognized the important role played by money in the economy a long time ago. However, it was only approximately 50 years ago that Milton Friedman convincingly proved that change in the quantity of money in the economy might have a very serious effect on the GDP. This paper reveals a most intimate non-linear linkage between growth of real GDP and growth of real money supply using the example of a number of countries and unions (Russia, Japan, Brazil and Eurozone). It is shown that exponential growth of real money supply corresponds to linear growth of real GDP. Hypotheses are advanced which explain such a nature of the inter-linkage. A number of practical recommendations are given which pertain, first of all, to monetary policy. |
| Keywords: | GDP, economic growth, money supply, monetary policy, Central Banks |
| JEL: | E41 E50 E51 E52 E58 O11 O23 O42 |
| Date: | 2015–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67461&r=fdg |
| By: | Zeyyad Mandalinci (Queen Mary University of London) |
| Abstract: | This paper examines the effects of monetary policy shocks on UK regional economic growth and dispersion in a novel Constrained Mixed Frequency Vector Autoregressive framework. Compared to a standard MFVAR, the model partially accounts for missing quarterly observations for regional growth by exploiting national growth data. Results suggest significant heterogeneity in the importance of monetary policy shocks across regions. Mortgage indebtedness is highly related to regional sensitivity to monetary policy shocks. Also, there is some evidence suggesting that regions with larger share of manufacturing output and small and medium sized firms in employ ment are more sensitive to monetary policy shocks. |
| Keywords: | Regional growth, Monetary policy, Bayesian analysis, VAR, Mixed frequency data |
| JEL: | E01 E3 E52 C11 C32 C5 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp758&r=fdg |
| By: | Shimaa Elkomy; Hilary Ingham; Robert Read |
| Abstract: | This study investigates the role of income levels, using the World Bank income classification, and political development, using EIU Democracy Index scores, in determining the magnitude of FDI growth effects for a panel of 61 emerging and developing countries for the period 1989 to 2013. It tests a baseline growth model incorporating these variables which is then extended to include FDI interaction effects with human capital, measured using secondary school enrolment data, and political development. The separate growth effects of FDI are then tested separately for each of the three lower World Bank income classifications (Upper-Middle, Lower-Middle and Low Income) followed by three categories of political regime type derived from Democracy Index. The effects of FDI are found to vary significantly between income classifications with the strongest growth effects in Low Income countries and weaker negative effects in Upper-Middle Income countries. The growth interaction effects between FDI and human capital are found to be strongly positive regardless of regime type. Political development in conjunction with FDI appears to suppress the growth effects of FDI in authoritarian countries while enhancing them in ‘hybrid’ democracies. For more democratic countries, human capital is a more important driver of growth than FDI but this is the outcome of strongly positive interaction effects between FDI and human capital outweighing negative effects for human capital on its own. The paper also provides some support for the view that a critical threshold of human capital is required to generate beneficial spillover growth effects from inflows of FDI. This paper provides new and more detailed insights into the growth effects of FDI with particular respect to income classification and political regime type in emerging and developing countries. |
| Keywords: | Foreign direct investment, economic growth, developing countries, income level, political development, panel analysis |
| JEL: | F23 O11 O14 O47 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:95922154&r=fdg |