nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒09‒25
six papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Foreign Aid, Public Investment and Capital Market Liberalization By Hamzeh Arabzadeh
  2. Taxation, bubbles and endogenous growth By Stefano Bosi; Ngoc-Sang Pham
  3. Does It Pour When it Rains? Capital Flows and Economic Growth in Developing Countries By Jean-Louis COMBES; Tidiane KINDA; Patrick PLANE; Rasmané OUEDRAOGO
  4. Debt-growth linkages in EMU across countries and time horizons By Marta Gómez-Puig; Simón Javier Sosvilla-Rivero
  5. Two Centuries of Finance and Growth in the United States, 1790-1980 By Howard Bodenhorn
  6. Life after default? Private vs. official sovereign debt restructurings By Silvia Marchesi

  1. By: Hamzeh Arabzadeh (Paris School of Economics, Université Paris 1 Panthéon-Sorbonne, CES and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper studies the impact of liberalization of capital market on the performance of foreign aid (FA). I consider two cases where FA is transferred to the households and where it is used to finance public investment. Two sources of endogenous productivity growth is considered: (i) public investment (ii) Learning-by-doing generated by tradable sector. Saving is endogenous. I compare two recipient economies with closed and open capital market. I show that transferred-aid reduces productivity and growth through de-industrialization if the capital market is liberalized. In the case of closed capital market transferred-aid can improve the growth (through improving the accumulation of capital) if LBD effect and consumption intensity to N-sector are small. On the contrary, the effect of invested-aid on growth is positive only if the quality of aid is high and the LBD effect and the intensity of public investment to N-sector are low. In this case, the effect of invested-aid on productivity is higher in the case of closed capital market. Nevertheless, productive foreign aid crowds out capital accumulation if capital market is closed while it leads to capital inflow if capital market is open. I show that the impact of invested-aid on GDP is more important for financially liberalized economy if LBD effect is low and private consumption is not very intensive to the N-sector.
    Keywords: Foreign Aid, Dutch disease, LBD effect, Capital market liberalization, Growth
    JEL: O14 O24 H54 F35
    Date: 2016–08–27
  2. By: Stefano Bosi (EPEE (University of Evry)); Ngoc-Sang Pham (LEM (University of Lille 3) and EPEE (University of Evry))
    Abstract: We study the interplay between taxation, bubble formation and eco- nomic growth. A rational bubble may be beneficial when growth is fu- elled by public investment (or R&D externalities) and the government levies taxes on bubble returns to finance this investment. Our main result challenges the conventional view about the negative effect of bubbles in endogenous growth (Grossman and Yanagawa, 1993).
    Keywords: taxation on financial revenue, public R&D, endogenous growth
    JEL: E44 H23 O30
    Date: 2016
  3. By: Jean-Louis COMBES (Cerdi - Université d'Auvergne); Tidiane KINDA (FERDI); Patrick PLANE (Cerdi); Rasmané OUEDRAOGO (FERDI)
    Abstract: This paper assesses the impact of capital inflows and the composition on the real exchange rate and economic growth in developing countries. Capital inflows can directly support economic growth by relaxing constraints on domestic resources, but can also indirectly weaken growth through the appreciation of the real exchange rate. We employ the Generalized Method of Moments (GMM) for dynamic panel data to deal with the endogeneity bias. Using a large sample of 77 low- and middle-income countries over the period 1980-2012, the results clearly show that capital inflows affect directly and indirectly economic growth. Our main findings are as follows:- (i) a 1 percent increase in total net capital inflows appreciates the real exchange rate by 0.5 percent; (ii) the real exchange rate appreciation effect of remittances is twice as big as the effect of aid, and ten times bigger than the effect of FDI; (iii) overall, capital inflows are associated with higher economic growth after netting out the negative impact of real exchange rate appreciation. Doubling capital inflows per capita would increase growth by about 50, resulting in a gain of roughly 2 additional percentage points on top of the 3.7percent annual growth rate observed within the sample over the period 1980-2012. Keywords : Capital inflows, real exchange rate dynamics, economic growth
    Keywords: Capital inflows, real exchange rate dynamics, economic growth
    JEL: F3 F4 O4
    Date: 2016–07
  4. By: Marta Gómez-Puig (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Javier Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: This paper contributes to the literature by empirically examining whether the influence of public debt on economic growth differs between the short and the long run and presents different patterns across euro-area countries. To this end, we use annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1960-2012 period and estimate a growth model augmented for public debt using the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our findings tend to support the view that public debt always has a negative impact on the long-run performance of EMU countries, whilst its short-run effect may be positive depending on the country.
    Keywords: Public debt; Economic growth; Bounds testing; Euro area; Peripheral EMU countries; Central EMU countries.
    Date: 2016
  5. By: Howard Bodenhorn
    Abstract: Do efficient financial markets and institutions promote economic growth? Have they done so in the past? In this essay, to be included in the Handbook of Finance and Development (edited by Thorsten Beck and Ross Levine), I survey a large and diverse historical literature that explores the connection between finance and growth in US history. The US financial system was important in mobilizing savings, allocating capital, exerting corporate control, and mitigating borrower opportunism. US finance was characterized by a wide variety of intermediaries – commercial banks, savings banks, building and loan associations, mortgage companies, investment banks and securities markets – that emerged to fill specific financial niches, compete with and complement the activities of existing intermediaries. The weight of the evidence is consistent with the interpretation that finance facilitated and encouraged growth. Despite the breadth and diversity of approaches, there remain many potentially fruitful lines of further inquiry.
    JEL: G2 N2
    Date: 2016–09
  6. By: Silvia Marchesi (University of Milano Bicocca and Centro Studi Luca d'Agliano)
    Abstract: This paper studies the relationship between sovereign debt default and annual GDP growth taking into account the depth of a debt restructuring and distinguishing between commercial and official sovereign debt restructurings. Analyzing 73 default episodes in 117 countries over the period 1975-2013, I fi…nd that defaults are correlated with contraction of short-term output growth. Most importantly, controlling for the severity of the default, I am able to detect a more lasting and negative link between default and growth. While higher private haircuts imply a negative stigma which is associated to lower growth over a longer period, higher amount of official restructuring may have some costs in the short-run, but are associated to an increase in growth in the long run. Adopting an alternative speci…cation, in which the dependent variable is a country’'s credit rating, I fi…nd very similar results for private haircuts and official restructurings. They are both associated to lower ratings up to seven years after the default. To the extent that credit ratings is a good proxy for borrowing costs, positive growth prospects for official defaulters seem not to be in‡uenced by a lower reputation in the credit markets.
    Keywords: Haircuts, Output losses, Sovereign defaults
    JEL: F34 G15 H63
    Date: 2016–08–26

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