nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒10‒09
four papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. FDI and Growth in the MENA countries: Are the GCC countries Different? By Gammoudi, Mouna; Cherif, Mondher; Asongu, Simplice A
  2. Macroeconomic Effects of Financial Shocks: Comment By Pfeifer, Johannes
  3. On some recent proposals of public debt restructuring in the Eurozone By Ernesto Longobardi; Antonio Pedone
  4. On the interplay between speculative bubbles and productive investment By Xavier Raurich; Thomas Seegmuller

  1. By: Gammoudi, Mouna; Cherif, Mondher; Asongu, Simplice A
    Abstract: This paper examines the relationship between Foreign Direct Investment (FDI) and per capita Gross Domestic Product (GDP) in the Middle East and North Africa (MENA) region for the period 1985-2009. The empirical evidence is based on an endoeneity-robust Generalised Method of Moments. Results show that the effect of FDI on per capita income in the Gulf Cooperation Council (GCC) countries is positive but negative in Non-GCC countries. Results also reveal that in contrast to the GCC countries, the financial openness policy in the Non-GCC countries have reduced the benefits of FDI on growth, this finding is explained by the fact that most of the Non-GCC countries that have engaged in the process of financial reforms have poor quality of institutions. These results are confirmed with both annual data and five year average data.
    Keywords: FDI, growth, GMM, financial openness, Institutions
    JEL: C52 F21 F23 O40 P37
    Date: 2016–06
  2. By: Pfeifer, Johannes
    Abstract: Urban Jermann and Vincenzo Quadrini (2012) argue that financial shocks are the most important factor driving U.S. business cycles. I show that the construction of their TFP measure suffers from data problems. A corrected TFP measure is able to account for most of the Great Recession. Their estimated DSGE model is also affected by several issues. In a properly reestimated model, marginal efficiency of investment shocks explain most of output volatility, while the contribution of financial shocks is 6.5 percent as opposed to the 46 percent originally reported. Still, financial shocks contribute 2-3 percentage points to the observed GDP drop during the Great Recession.
    Keywords: Financial Frictions, Pecking Order, Marginal Efficiency of Investment
    JEL: E23 E32 E44 G01 G32
    Date: 2016–07
  3. By: Ernesto Longobardi (Università degli Studi di Bari "Aldo Moro"); Antonio Pedone (Università di Roma “La Sapienza”)
    Abstract: This paper considers the issue of sovereign debts in the Eurozone. The reasons for the reduction of public debt, which are quite strong in the present circumstances of slow growth, are briefly discussed with reference to EMU countries. Then the different possible strategies to reduce the public debt/GDP ratio while avoiding any form of debt restructuring are considered. The choice to cut public debt by means of a violent and unexpected upsurge of inflation, which in the past has often been the preferred solution, is not viable today in the Union. On the other side, alternative option for reducing the public debt by means of extraordinary finance instruments, such as wealth taxes, privatization of public companies and sale of public assets can assure only limited results. Thus the policy presently adopted in the EU, relying on the progressive accumulation of surpluses in the general government’s primary budget (the austerity solution), seems to be the only practicable exit. However the alternative of restructuring has been investigated with growing attention in the last few years. Two distinct perspectives have been followed. On one side a number of proposals deal with the issue of existing (legacy) debt. On the other one, several projects have been presented aimed to establish a permanent insolvency mechanism for sovereigns. The former group of projects wants to avoid the private sector involvement and are based on complex mechanism of securitization of future revenue of member states (seigniorage and taxes). There are reasons to doubt that they are something substantially different from the policies currently followed and, especially, that can be more favourable to growth. The latter group of proposals, concerning the institution of an ordered procedure of insolvency for sovereigns, are meant to make effective the no bail out principle, whose compliance has proved very difficult so far. The question is raised if this perspective is really realisable in the absence of any element of fiscal union.
    Keywords: Euro area debt crisis; restructuring legacy debt; sovereign insolvency procedure
    JEL: F34 H12 H63
    Date: 2016–09
  4. By: Xavier Raurich (Universitat de Barcelona); Thomas Seegmuller (Aix-Marseille University)
    Abstract: The aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones. A three-period lived overlapping generations model allows us to make this distinction. Agents have two investment decisions. When young, they can invest in productive capital that provides a return during the following two periods. When young or in the middle age, they can also invest in a bubble. Assuming, in accordance with the empirical evidence, that the bubbleless economy is dynamically efficient, the existence of a stationary bubble raises productive investment and production. Indeed, young agents sell short the bubble to increase productive investments, whereas traders at middle age transfer wealth to the old age. We outline that a technological change inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital, production and the bubble size. This framework also allows us to discuss several economic applications: the effects of both regulation on limited borrowing and fiscal policy on the occurrence of bubbles, the introduction of a probability of market crash and the effect of bubbles on income inequality.
    Keywords: Bubble, Efficiency, Vintage capital, Short sellers, Overlapping generations.
    JEL: E22 E44 G12
    Date: 2016

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