nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒01‒18
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Going Up and Down: Rethinking the Empirics of Growth in the Developing and Newly Industrialized World By Francesco Lamperti; Clara Elisabetta Mattei
  2. The Knowledge Transmission Mechanism and Austerity By Simon Wren-Lewis
  3. Instrumental Variables in the Long Run By Casey, Gregory; Klemp, Marc
  4. Financial Effects of Fiscal Transparency: A Critique By Anton Gerunov
  5. The Impact of Variations in Institutional Grafting Modes on Economic Growth: A Three-Dimensional Approach By Tamilina, Larysa; Tamilina, Natalya
  6. Filling the gap: open economy considerations for more reliable potential output estimates By Zsolt Darvas; Andras Simon

  1. By: Francesco Lamperti; Clara Elisabetta Mattei
    Abstract: Growth dynamics are remarkably heterogeneous, in particular when one focuses on developing countries. Economic miracles and failures are embedded within extended phases of either growth or decline. We propose a methodology and a taxonomy that will characterize countries' growth patterns on the basis of the sequence of regimes they experience. In particular, we emphasize the difference between expansionary and recessionary regimes and, after classifying the growth pattern of all 123 developing countries in our dataset, we explore cross-sectional empirical regularities which emerge during upward and downward growth phases. Results show that expansionary regimes are associated with convergence and positive correlation between growth and (short run) volatility. On the contrary, in recessionary regimes, poorer countries face deeper failures and a negative correlation between growth and volatility is found, signifying that output fluctuates less around the trend during strong rather than mild recessions. Finally, we discover that regimes of growth and recession show similar average length (about 16 years). Although recessions on average are remarkably pronounced (14% loss), during expansions the magnitude of growth is much larger.
    Keywords: growth, structural breaks, expansionary and recessionary regimes, convergence
    Date: 2016–01–13
  2. By: Simon Wren-Lewis
    Abstract: How do economic policy mistakes happen? One view is that policy makers are benevolent, and errors arise because economic theories are inadequate. Another is that policy makers pursue sectional interests that may have no relation to any academic consensus on good policy. This paper examines a third alternative: policy makers want to do the right thing (although they have political preferences), and the academic consensus is correct, but policy makers do not follow it because they rely on imperfect intermediaries. I use this framework to examine the global switch to fiscal austerity in 2010.
    Date: 2015
  3. By: Casey, Gregory; Klemp, Marc
    Abstract: In the field of long-run economic growth, it is common to use historical or geographical variables as instruments for contemporary endogenous regressors. We study the interpretation of these conventional instrumental variable (IV) regressions in a simple, but general, framework. We are interested in estimating the long-run causal effect of changes in historical conditions. For this purpose, we develop an augmented IV estimator that accounts for the degree of persistence in the endogenous regressor. We apply our results to estimate the long-run effect of institutions on economic performance. Using panel data, we find that institutional characteristics are imperfectly persistent, implying that conventional IV regressions overestimate the long-run causal effect of institutions. When applying our augmented estimator, we find that increasing constraints on executive power from the lowest to the highest level on the standard index increases national income per capita three centuries later by 1.2 standard deviations.
    Keywords: Long-Run Economic Growth, Instrumental Variable Regression
    JEL: C10 C3 C30 O10 O40
    Date: 2016–01–07
  4. By: Anton Gerunov (Faculty of Economics and Business Administration, Sofia University St Kliment Ohridski)
    Abstract: This paper investigates the effects of budget transparency on fiscal performance. It fits a panel regression model on data from the Open Budget Index through its five rounds (OBI 2006-OBI 2015) and investigates the effect of openness on budget balance, primary balance and government debt across a sample of 57 countries. We seek to validate the proposed positive effect of fiscal transparency on objective performance indicators. Main results show that the link between openness and budget balance is relatively weak, while the effect of OBI on debt is more robust. This effect is also differentiated, with the lowest and highest-income countries benefitting most from openness.
    Keywords: budget, transparency, fiscal openness, deficit, debt
    JEL: H61 H62
    Date: 2016–01
  5. By: Tamilina, Larysa; Tamilina, Natalya
    Abstract: This article explains the peculiarities of institutional effects on growth rates in post-communist countries. By proposing a certain dependence of the institution-growth nexus on the mode of institutional grafting, the distinction between drift-phase and path-breaking institutional change is introduced. Theoretical juxtapositions show that transition countries’ institutions built through path-breaking institutional reforms differ from those that emerge evolutionarily in the drift phase in a twofold manner in their relationship to growth. Growth rates of their economies are less likely to depend on the quality of legal institutions and are more likely to be a function of the maturity of political institutions. In addition, legal institutional change in the post-communist world is a product of the quality of the political environment to a greater extent than their drift-phase alternatives. These propositions are tested empirically based on a sample of 87 countries derived from the POLITY IV Project's website.
    Keywords: institutional economics, formal institutions, institutional change, post-communist transition
    JEL: K40 O10 O17
    Date: 2015–04–16
  6. By: Zsolt Darvas (Institute of Economics - Centre for Economic and Regional Studies - Hungarian Academy of Sciences and Bruegel and Corvinus University of Budapest); Andras Simon (retired Head of Research at the Central Bank of Hungary)
    Abstract: This paper argues that the Phillips curve relationship is not sufficient to trace back the output gap, because the effect of excess demand is not symmetric across tradeable and non-tradeable sectors. In the non-tradeable sector, excess demand creates excess employment and inflation via the Phillips curve, while in the tradeable sector much of the excess demand is absorbed by the trade balance. We set up an unobserved-components model including both a Phillips curve and a current account equation to estimate ‘sustainable output’ for 45 countries. Our estimates for many countries differ substantially from the potential output estimates of the European Commission, IMF and OECD. We assemble a comprehensive real-time dataset to estimate our model on data which was available in each year from 2004-15. Our model was able to identify correctly the sign of pre-crisis output gaps using real time data for countries such as the United States, Spain and Ireland, in contrast to the estimates of the three institutions, which estimated negative output gaps real-time, while their current estimates for the pre-crisis period suggest positive gaps. In the past five years the annual output gap estimate revisions of our model, the European Commission, IMF, OECD and the Hodrick-Prescott filter were broadly similar in the range of 0.5-1.0 percent of GDP for advanced countries. Such large revisions are worrisome, because the European fiscal framework can translate the imprecision in output gap estimates into poorly grounded fiscal policymaking in the EU.
    Keywords: equilibrium current account; international trade; Kalman-filter; open economy; Phillips-curve; potential output; real-time data; sustainable output; state-space models
    JEL: C32 E32 F41
    Date: 2015–12

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