nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2015‒12‒08
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Government Size, Institutions, and Export Performance among OECD Economies By Bournakis, Ioannis; Tsoukis, Christopher
  2. Finance, Volatility, and Growth By Lukas Schmid; Howard Kung; Alexandre Corhay
  3. Exports, imports, FDI and GDP in the Republic of Korea: 1980-2014 By Julen Berasaluce; José Romero
  4. Inflation targeting in developing economies revisited By John Thorton
  5. Unified Growth Theory Contradicted by the GDP/cap Data By Ron W Nielsen
  6. Taylor rules, central bank preferences and inflation targeting By Juan Paez-Farrell

  1. By: Bournakis, Ioannis; Tsoukis, Christopher
    Abstract: With a panel of 18 OECD countries, 1980-2005, we investigate the determinants of export performance, in particular the effects of the size of government and institutional features. In a model of endogenous extent of domestically-produced goods, government size has a non-linear effect on export performance; the export-maximising size of government (tax receipts) is around 40-45% of GDP; the best size of productive government spending is around 16% of GDP. Product market and labour market-related rigidities affect negatively the export performance both on their own and via a negative effect on the effectiveness of R&D and slow down the speed of adjustment. Among traditional variables, relative unit labour cost, R&D shares in GDP, TFP growth and human capital show up significantly and with the expected signs.
    Keywords: Export shares, government size, institutions, unit labour cost, competitiveness
    JEL: E02 F14 F41
    Date: 2015–11
  2. By: Lukas Schmid (Duke University); Howard Kung (London Business School); Alexandre Corhay (University of British Columbia, Sauder School of Business)
    Abstract: Is there a fundamental link between macroeconomic risk and growth? Is there a causal link between finance and growth? These questions are central for the design of stabilization policies and for welfare. How- ever, no consensus has yet emerged in the literature. We contribute to that debate by developing a general equilibrium stochastic endogenous growth model that allows to examine the impact of financial frictions on volatility and growth. In the model, growth is driven by the endogenous accumulation of physical and intangible capital, both of which are subject to distinct financial frictions. We characterize the conditions under which finance and volatility foster growth. We find that in the presence of relatively mild financial frictions, alleviating financial constraints leads to both higher average as well as more volatile growth rates, so that a trade-off between volatility and growth emerges. When financial frictions primarily affect physical capital accumulation, the ensuing cycles occur at business cycle frequency. On the other hand, frictions to intangible capital accumulation imply amplified low-frequency movements. The welfare implications depend on preferences: with recursive preferences, low-frequency volatility is very costly
    Date: 2015
  3. By: Julen Berasaluce (El Colegio de México); José Romero (El Colegio de México)
    Abstract: In this paper, we have set up an empirical analysis of the economic growth in Korea between 1980 and 2015, in order to identify the potential relationships between relevant variables. We chose to study Korea because is a country notable for applying industrial policies. We compare the export-led growth versus growth-driven exports hypotheses, we also compare the contribution of FDI to economic growth hypothesis versus its opposite, the idea that a rapid economic growth attracts FDI; we also compare other opposing hypotheses. A four-variable vector autoregression (VAR) is used to study the relationships between trade, foreign direct investment (FDI) and economic growth using quarterly data from 1980 to 2014. We estimated the Granger causality/Block exogeneity test, and calculated the Impulse Response Functions and Variance Decomposition. The main findings are that the three tests confirm the growth-driven exports hypothesis, as well as that FDI has no effect on economic growth or exports. We consider that these results for Korea have a significant relevance for Latin America and other regions that are searching for policies to enhance economic growth.
    Keywords: South Korea, VAR, industrial policy, exports, imports, FDI, growth
    JEL: C32 F14 F21
    Date: 2015–12
  4. By: John Thorton (Bangor University)
    Abstract: In a recent paper, Gonalvez and Salles (2008) (G-S) report that developing countries adopting the inflation targeting regime experienced greater drops in inflation and GDP growth volatility than non-inflation targeting developing countries. In this paper, I find that the G-S results do not hold up when their analytical framework is employed in the context of a more rational and larger sample of developing countries that controls for the comparability of monetary regimes as suggested by Ball (2010). In particular, adoption of an IT regime did not help reduce inflation and growth volatility in developing countries compared to the average experience with other monetary regimes and was no more advantageous in these regards than the adoption of a hard or crawling peg exchange rate regime.
    Keywords: inflation targeting, monetary regimes, developing economies
    JEL: E4 E5
    Date: 2015–07
  5. By: Ron W Nielsen
    Abstract: Mathematical properties of the historical GDP/cap distributions are discussed and explained. These distributions are frequently incorrectly interpreted and the Unified Growth Theory is an outstanding example of such common misconceptions. It is shown here that the fundamental postulates of this theory are contradicted by the data used in its formulation. The postulated three regimes of growth did not exist and there was no takeoff at any time. It is demonstrated that features interpreted as three regimes of growth represent just mathematical properties of a single, monotonically-increasing distribution, indicating that a single mechanism should be used to explain the historical economic growth. It is shown that using different socio-economic conditions for different perceived parts of the historical GDP/cap data is irrelevant and scientifically unjustified. The GDP/cap growth was indeed increasing slowly over a long time and fast over a short time but these features represent a single, uniform and uninterrupted growth process, which should be interpreted as whole using a single mechanism of growth.
    Date: 2015–09
  6. By: Juan Paez-Farrell (Department of Economics, University of Sheffield)
    Abstract: The objective of this paper is to infer the policy preferences of three inflation targeting central banks, Australia, Canada and New Zealand, using an estimated New Keynesian small open economy model. While I assume that the monetary authorities optimise, I depart from previous research by assuming that monetary policy is implemented via simple Taylor-type rules, as suggested by most of the empirical literature. I then derive the weights in the objective function that make the resulting optimal interest rate rule coincide with its estimated counterpart. Therefore, from the central bank’s point of view, actual policy is optimal.
    Keywords: Small open economies; monetary policy; policy preferences; Taylor rule; inverse opti-mal control; inflation targeting
    JEL: E52 E58 E61 F41
    Date: 2015–11

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