nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒11‒15
eight papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Fiscal policy and economic performance: A review of the theoretical and empirical literature By Halkos, George; Paizanos, Epameinondas
  2. Revisiting the role of public debt in economic growth: The case of OECD countries By Mencinger, Jernej; Verbic, Miroslav; Aristovnik, Aleksander
  3. Growth and Trade with Frictions: A Structural Estimation Framework By Anderson, James; Larch, Mario; Yotov, Yoto
  4. Balanced Growth Despite Uzawa By Gene M. Grossman; Elhanan Helpman; Ezra Oberfield; Thomas Sampson
  5. Fiscal policy adjustments in the euro area stressed countries: new evidence from non-linear models with state-varying thresholds By De Santis, Roberto A.; Legrenzi, Gabriella; Milas, Costas
  6. Modeling Economic Growth: Domar on Moving Equilibrium By Mauro Boianovsky
  7. Shadow Banking, Relationship Banking, and the Economics of Depression By Antonio Bianco
  8. Tribalism and Financial Development By Kodila-Tedika, Oasis; Asongu, Simplice

  1. By: Halkos, George; Paizanos, Epameinondas
    Abstract: The economic implications of government expenditure have been shown to be significant and broad. In particular, government spending has been shown to enhance long-run economic growth by increasing the level of human capital and Research and Development (R&D) expenditure, and by improving public infrastructure. On the other hand, there is evidence that a greater size of government spending may be less efficient and therefore not necessarily associated with a better provision of public goods and higher levels of economic growth. Moreover, it is likely that the size of government expenditure and its composition are associated with key aspects of the quality of growth, such as income inequality and environmental sustainability. This paper presents a review of the theoretical and empirical literature on the relationship between fiscal policy and economic activity, both in terms of long-run economic growth and short-term output fluctuations. In general, empirical evidence on these relationships is not robust and remains inconclusive.
    Keywords: Fiscal policy; Economic growth; Government Expenditure; Taxation.
    JEL: E62 H2 H5 O44 O47 Q01 Q56
    Date: 2015–11
  2. By: Mencinger, Jernej; Verbic, Miroslav; Aristovnik, Aleksander
    Abstract: The paper empirically explores the factor of public debt which considerably changes the transmission mechanism of fiscal policy effects to economic activity in the short term. We examined and evaluate the direct effect of higher indebtedness in the public sector on economic growth for a panel dataset of overall 36 countries (25 EU member states and 11 OECD countries). Our examination will shed light on the current debt problem by identifying a possible non-linear relationship between the level of public debt and economic growth, with an explicit focus to determine the threshold values for our sample of countries. Our sample is divided into subgroups distinguishing between so-called developed, covering the period 1980–2010, and emerging economies, covering the period 1995–2010. Extending our previous research we are particularly interested in the existence of a non-linear impact of government debt on the behaviour of GDP growth. In order to account for the impact of the level of the debt-to-GDP ratio on the real growth rate of GDP, we employ a panel estimation on a generalized economic growth model augmented with a debt variable, while also considering some methodological issues like the problems of heterogeneity and endogeneity. The results confirm the general theoretical assumption that at low levels of public debt the impact on growth is positive, whereas beyond a certain debt turning point a negative effect on growth prevails. Further, we calculated that the debt-to-GDP turning point, where the positive effect of accumulated public debt inverts into a negative effect, is roughly between 90% and 94% for developed economies. Yet for emerging countries the debt-to-GDP turning point is lower, namely between 44% and 45%. Therefore, we can confirm our hypothesis that the threshold value for emerging is lower than for the developed in our sample.
    Keywords: fiscal policy; public debt; economic growth; panel analysis; turning points; EU
    JEL: C23 H63
    Date: 2015
  3. By: Anderson, James (Department of Economics and NBER); Larch, Mario (Rechts- und Wirtschaftswissenschaftliche Facultät); Yotov, Yoto (School of Economics, ERI-BAS & CESifo)
    Abstract: We build and estimate a structural dynamic general equilibrium model of growth and trade. Trade affects growth through changes in consumer and producer prices that in turn stimulate or impede physical capital accumulation. At the same time, growth affects trade, directly through changes in country size and indirectly through altering the incidence of trade costs. The model combines structural gravity with a capital accumulation specification of the transition between steady states. Theory translates into an intuitive econometric system that identifies the causal impact of trade on income and growth, and also delivers estimates of the key structural parameters in our model. Counterfactual experiments based on the estimated model give evidence for strong dynamic relationships between growth and trade, resulting in doubling of the static gains from trade liberalization.
    Keywords: Trade; Growth; Income; Trade Liberalization; Capital Accumulation
    JEL: F10 F43 O40
    Date: 2015–07–10
  4. By: Gene M. Grossman; Elhanan Helpman; Ezra Oberfield; Thomas Sampson
    Date: 2015–01
  5. By: De Santis, Roberto A.; Legrenzi, Gabriella; Milas, Costas
    Abstract: We introduce a non-linear model to study the adjustment of fiscal policy variables in Greece, Ireland, Portugal and Spain over the last 50 years, based on endogenously estimated budget deficit-to-GDP thresholds, which vary with fiscal disequilibria, the economic cycle and financial market conditions. We find that the budget deficit-to-GDP thresholds were rather high for Greece and Portugal particularly after 1999 and that the fiscal adjustments in "good" times were very different from the adjustments that took place in "bad" times. We also found that only in Spain fiscal deficits were reduced in expansionary times. Finally, we provide evidence that, under financial market pressure, fiscal authorities relaxed the fiscal deficit-to-GDP threshold for the adjustment in Ireland and Spain and reduced such threshold for the adjustment in Portugal. JEL Classification: H63, H20, H60, C22
    Keywords: budgetary disequilibria, euro periphery, European debt crisis, fiscal adjustments, non-linear models
    Date: 2015–10
  6. By: Mauro Boianovsky
    Abstract: The paper investigates Evsey’s Domar’s introduction of the rate of growth as a variable in economics in the 1940s and 1950s . Domar investigated the nature of what he called the “moving equilibrium” of ec onomic processes with infinite duration. Reactions to Domar’ s approach at the time brought about methodological assertions on the distinction between models and theories. Domar’s model was an open one, in the sense that his growth equation allowed different closures. A main feature of the model was its relatively stable capital - output ratio, whi ch reflected the terms of the debate about A.H. Hansen’s stagnation thesis in the 1940s and the notion of limits to capital deepening. At the empirical level, Domar referred to some features of time series, such as the positive trend of output per capita. Differently from Harrod, t he real economy was supposed to be stable, although the model itself was not perfectly consistent with that. The estimation of the Residual (a term coined by Domar) by Solow and others led Domar to rethin k aspec ts of his original model
    Keywords: Domar, growth economics, models, capital - output ratio, stability
    JEL: B21 C6 C92 B4 D03 D61 G28
    Date: 2015
  7. By: Antonio Bianco (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).)
    Abstract: A simple stock-flow consistent methodological account of the influence of financial markets over the real economy is here presented. The model is so devised as to allow a tidy comparison of relationship or shadow banking interpreted as alternative schemes of liquidity (not credit) risk management. The essential mechanism that is here at work is 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. Having this in mind, the model emphasizes the interdependencies in entrepreneurs’ variations in animal spirits, financial institutions’ idiosyncratic liquidity risk management (ILRM), and households’ effective demand. The model key finding is that both relationship and shadow banking entail a pro-cyclical impact and that differences implied in the two cases can be reduced to the different ILRM aggregate cost functions. As for policy implications, the model suggests that securitisation is not per se leading to financial unsustainability, yet regulatory measures aimed at checking predatory lending and the CDO industry are needed: failing these, securitisation is likely to have a depressive impact on non-financial entrepreneurs’ confidence, and hence on the financial sustainability of a growth process.
    Keywords: animal spirits, endogenous money, liquidity risk management, securitisation, originate-to-hold, originate-to-distribute.
    JEL: B52 E12 E20 E44 M40
    Date: 2015–10
  8. By: Kodila-Tedika, Oasis; Asongu, Simplice
    Abstract: We assess the correlations between tribalism and financial development in 123 countries using data averages from 2000-2010. The tribalism index is used to measure tribalism whereas financial development is measured from perspectives of financial intermediary and stock market developments. The long-term variable is stock market capitalisation while short-run indicators include: private and domestic credits. We find that tribalism is negatively correlated with financial development and the magnitude of negativity is higher for financial intermediary development relative to stock market development. The findings are particularly relevant to African and Middle Eastern countries where the scourge is most pronounced.
    Keywords: Tribalism; Financial Development
    JEL: E62 G20 H11 H20 O43
    Date: 2015–05

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