nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒12‒01
eight papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. On the link between real exchange rate misalignment and growth: theory and empirical evidence By Diallo, Ibrahima Amadou
  2. Government expenditure, external and domestic public debts, and economic growth. By Duc-Anh Le; Cuong Le Van; Phu Nguyen-Van; Amélie Barbier-Gauchard
  3. Migrants' Remittances: Channelling Globalization By Anghel, Remus Gabriel; Piracha, Matloob; Randazzo, Teresa
  4. Early Warning Signs of the Economic Crisis in Greece: A Warning for Other Countries and Regions By Ron W Nielsen
  5. Future-biased government By Francisco M. Gonzalez; Itziar Lazkano; Sjak A. Smulders
  6. Discounting and Welfare Evaluation of Policies By Mertens, Jean-Francois; Rubinchik, Anna
  7. The effect of including the environment in the neoclassical growth model By Halkos, George; Psarianos, Iacovos
  8. Population growth and structural transformation By Ho, Chi Pui

  1. By: Diallo, Ibrahima Amadou
    Abstract: This paper analyzes the effect of real exchange rate (RER) on economic growth both theoretically and empirically. The first part builds an endogenous growth model which illustrates that an RER appreciation reduces the growth rate in the centralized and decentralized economies. Additionally, the model shows that taxes have a negative effect on growth. The second part employs the new Cross-Sectionally Augmented Distributed Lag Estimator to empirically study the impact of RER misalignment on economic growth. The results demonstrate that RER misalignment acts harmfully on growth. Thus corroborating what we found theoretically. The empirical findings also confirm the adverse effect of taxes on growth. The negative impact of RER misalignment on growth are maintained when we use alternative measurements of RER misalignment and subsamples of developed and developing countries. Finally, we discovered that very large misalignments have even greater damaging impacts on growth.
    Keywords: Cross-Sectionally Augmented Distributed Lag Estimator; Heterogeneous Panels; Dynamic Optimization; Endogenous Growth Theory; Long-Run Relationships;Mean Group Estimator; Misalignment; Real Exchange Rate; Taxes
    JEL: C61 H20 H61 O41 O47 O50
    Date: 2015–11–25
  2. By: Duc-Anh Le; Cuong Le Van; Phu Nguyen-Van; Amélie Barbier-Gauchard
    Abstract: This paper analyzes the relationship between government expenditure, tax on returns to asset, public debt, and economic growth. Public debt is composed of two components, domestic debt and external debt. We show that an increase in the tax rate on returns to asset leads to an increase in government expenditure, consumption, and domestic debt. However, the impact of tax rate on external debt is unclear. In some situation, in particular when the productivity of capital on production is low (high) and the tax rate is lower (higher) than a threshold, the relation between external debt and the tax rate has a bell-shaped form, i.e. external debt firstly rises then decreases with the tax rate.
    Keywords: Taxation; public expenditure; domestic debt; external debt; growth.
    JEL: H63 O40
    Date: 2015
  3. By: Anghel, Remus Gabriel (Romanian Institute for Research on National Minorities); Piracha, Matloob (University of Kent); Randazzo, Teresa (University of Kent)
    Abstract: In the past twenty years the ever-growing levels of migrants' remittances made state agencies, international organizations, scholars and practitioners to increasingly consider remittances as one of the main engines to promote globalization and growth in the developing world. By transferring home large amounts of money, information, ideas and practices, migrants and migrant organizations are often seen as able to produce significant changes in countries and localities of origin. Focusing on cases from former socialist countries and around the world, this paper discusses the main debates surrounding the effects and uses of migrant remittances. Furthermore, using different case studies from Europe and Asia, the paper addresses the notion of social remittances, namely the transfers of ideas, practices and norms between societies of origin and destination. It highlights the ideas and practices migrants transfer home, the types of social norms it generates, and the extent to which migration produces transformations in countries of origin.
    Keywords: remittances, social remittances, former socialist countries
    JEL: F22 F24
    Date: 2015–11
  4. By: Ron W Nielsen
    Abstract: Warning signs about the developing economic crisis in Greece were present in the growth rate of the Gross Domestic Product (GDP) and in the growth of the GDP well before the economic collapse. The growth rate was strongly unstable. On average, in less than 50 years, it decreased 10-folds but after reaching a low minimum it quickly increased 6-folds only to crash before completing the full cycle. The decreasing growth rate was leading to an asymptotic maximum of the GDP but it was soon replaced by a fast-increasing growth rate propelling the GDP along a pseudo-hyperbolic trajectory, which if continued would have escaped to infinity in 2017. Such a growth could not have been possibly supported. Under these conditions, the economic collapse in Greece was inevitable.
    Date: 2015–11
  5. By: Francisco M. Gonzalez (Department of Economics, University of Waterloo); Itziar Lazkano (University of Wisconsin-Milwaukee); Sjak A. Smulders (Tilburg University)
    Abstract: We argue that governments are future biased when they aggregate the preferences of overlapping generations. Future bias, which involves preference reversals favoring future over current consumption, explains why governments legislate old-age transfers at the expense of capital accumulation and growth, even if generations are altruistic.
    JEL: D71 D72 H55
    Date: 2015–10
  6. By: Mertens, Jean-Francois (CORE, Universite Catholique de Louvain); Rubinchik, Anna (Department of Economics, University of Haifa)
    Abstract: If policy discounting is to have any welfare relevance, it must be a derivative of a social welfare function. If that derivative is to have a net present value form, the baseline allocation must be stationary. Given a stationary baseline in an overlapping generations growth economy the inter-generationally fair discount rate under the relative utilitarian welfare function equals the growth rate of per-capita consumption, roughly, 2% for the U.S. This differs from the interest rate, even in the golden rule equilibrium unless population growth is null.
    Keywords: policy evaluation, discounting, social welfare function, social discount rate, overlapping generations
    JEL: D50 H43 H50
    Date: 2015–08–12
  7. By: Halkos, George; Psarianos, Iacovos
    Abstract: This study begins with an exposition of basic principles of the theory of Optimal Control as this is used in the development of the theory of Economic Growth. Then, a brief presentation of the Neoclassical Model of Economic Growth follows and two applications are presented. In the first, optimal control techniques are used, in the context of neoclassical growth, to maximize the representative household’s total intertemporal welfare. In the second, the same problem is posed with two additional variables that affect welfare in opposing ways: pollution and abatement expenditures. In both applications, the optimal steady-state conditions are derived. This allows for a preliminary comparison of the resulting balanced growth paths under the criterion of welfare maximization with and without environmental externalities. Finally, using a balanced panel data of 43 countries and for the time period 1990-2011 we test the validity of including the environment in the neoclassical growth model approximating pollution abatement with the electricity production from renewable sources and pollution with carbon dioxide emissions. With the help of adequate econometric panel data methods we test the validity of the environmental Kuznets curve hypothesis for the full sample, as well as for the OECD and non-OECD countries
    Keywords: Economic Growth; Physical Capital; Technological Progress; Environment; Pollution.
    JEL: C60 C61 C62 O41 O44 Q56 Q58
    Date: 2015–11–24
  8. By: Ho, Chi Pui
    Abstract: Population growth induces structural transformation. We posit two-sector growth models where land is a fixed production factor. When two sectoral goods are consumption complements, population growth pushes production factors towards the sector with stronger diminishing returns to labor through the relative price effect. We clarify conditions when production factors “embrace the land” and “escape from land” throughout development, and the models’ asymptotic growth paths. We calibrate the models to simulate sectoral shifts in pre-industrial England and modern United States. In both cases, relying solely on relative price effects (population growth, technological progress and capital deepening) predicts too slow structural transformation.
    Keywords: Structural transformation; Population growth effect; Relative price effects
    JEL: E1 N1 O5
    Date: 2015–11–19

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