nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒04‒02
seven papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Exposure to international crises: trade vs. financial contagion By Everett Grant
  2. Fiscal Policy and Growth By Saima Nawaz; Idrees Khawaja
  3. Financial Development and Growth: Panel Cointegration Evidence from South-Eastern and Central Europe By Stojkoski, Viktor; Popova, Kristina
  4. Financial Markets and Fiscal Unions By Patrick J. Kehoe; Elena Pastorino
  5. Uncertainty and Monetary Policy in Good and Bad Times By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  6. Endogenous Growth, Semi-endogenous Growth... or Both? A Simple Hybrid Model By Cozzi, Guido
  7. Fiscal sustainability under physical and human capital accumulation in an overlapping generations model By Takumi Motoyama

  1. By: Everett Grant
    Abstract: I identify new patterns in countries’ economic performance over the 2007-2014 period based on proximity through distance, trade, and finance to the US subprime mortgage and Eurozone debt crisis areas. To understand the causes of the cross-country variation, I develop an open economy model with two transmission channels that can be shocked separately: international trade and finance. The model is the first to include a government and heterogeneous firms that can default independently of one another and has a novel endogenous cost of sovereign default. I calibrate the model to the average experiences of countries near to and far from the crisis areas. Using these calibrations, disturbances on the order of those observed during the late 2000s are separately applied to each channel to study transmission. The results suggest credit disruption as the primary contagion driver, rather than the trade channel. Given the substantial degree of financial contagion, I run a series of counterfactuals studying the efficacy of capital controls and find that they would be a useful tool for preventing similarly severe contagion in the future, so long as there is not capital immobility to the degree that the local sovereign can default without suffering capital flight. JEL Classification: E32, F40, F41, F44, H63
    Keywords: Economic crises, contagion, endogenous costs of default, sovereign default, banking crisis, Great Recession, Eurozone debt crisis
    Date: 2016–11
  2. By: Saima Nawaz; Idrees Khawaja
    Abstract: This study seeks to examine the impact of fiscal policy on growth while accounting the level of development and controlling for the state of institutions. A theoretical framework is developed to examine the impact of fiscal policy on economic growth while controlling for institutionsWe extend the augmented Solow growth model by assuming that technological advancement depends not only upon constant rate of technological progress (as envisaged in the neoclassical model) but also upon fiscal policy and the quality of institutions. This provides a framework to analyze the impact of both the fiscal policy and institutions on economic growth. The empirical investigation uses panel data of 56 countries over 1981-2010. We use fixed effects model and a dynamic panel based on the System Generalized Method of Moments (SYS-GMM).In sum, the disaggregated results suggest that effectiveness of fiscal policy in generating growth is function of the level of development of an economy. Typically, in developed countries more resources are allocated to the sectors considered productive while in developing economies resources are not only misallocated but are also characterized by rent seeking and leakages. This difference in resource allocation is responsible for the different impact that government expenditures cast on growth. The resource allocation in a country, among other things, would depend upon the quality of institutions.
    Keywords: 56 countries: Developed and Developing, Growth, Public finance
    Date: 2015–07–01
  3. By: Stojkoski, Viktor; Popova, Kristina
    Abstract: Ever since Schumpeter, macroeconomists have argued that financial development has a large and direct effect on the long run wealth of a nation. In this paper, we empirically investigate this relationship for a panel of 16 South-Eastern and Central European countries over the period 1995-2014 by employing a state-of-the-art panel cointegration technique. We find that financial development has a positive effect on the income per capita. The effect is statistically robust to other estimation methods and is economically large since it is almost twice the size of the gross capital formation. Nevertheless, the panel cointegration tests indicate a possibility of an endogenous relationship between the phenomena.
    Keywords: panel-cointegration, financial development, economic growth
    JEL: C23 C51 E50 O11 O47 O52
    Date: 2016–01–24
  4. By: Patrick J. Kehoe; Elena Pastorino
    Abstract: Do sophisticated international financial markets obviate the need for an active union-wide authority to orchestrate fiscal transfers between countries to provide adequate insurance against country-specific economic fluctuations? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.
    JEL: E0 E5 E6 E62 F33 F36 F38 F42 F44
    Date: 2017–03
  5. By: Giovanni Caggiano (Department of Economics, Monash University; Department of Economics and Management, University of Padova; and Bank of Finland); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, the University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova); Gabriela Nodari (Reserve Bank of Australia)
    Abstract: We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated to jumps in financial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.
    Keywords: Uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2017–03
  6. By: Cozzi, Guido
    Abstract: First generation endogenous growth models had the counterfactual implication that the long-term growth of per-capita GDP increased with the population size. Two influential growth paradigms, the semi-endogenous and the second generation fully endogenous, eliminated this strong scale effect. Both solutions have useful aspects and insights, but very different policy implications. This paper combines both approaches into a single hybrid model class, and shows that no matter the weight assigned to each paradigm, the long-run predictions of the semi-endogenous policy dominate with high enough population growth rates, while the long-run predictions of the fully endogenous policy dominate at low population growth rates.
    Keywords: Strong scale effect; Semi-endogenous growth; Fully endogenous growth.
    JEL: O3 O4
    Date: 2017–02–24
  7. By: Takumi Motoyama (Graduate School of Economics, Osaka University)
    Abstract: We consider fiscal sustainability by using an overlapping generations model with human capital accumulation (private and public education) and public debt. Based on this model, we explicitly show (i) the parameter region in which the economy cannot be fiscally sustainable for any initial endowment, and (ii) the threshold of initial endowment over (under) which the economy diverges (converges) to the steady state. Importantly, the threshold is neutral to the level of initial human capital. Further, we show the existence and uniqueness of the growth-maximizing level of each policy variable (i.e., the tax rate and public education/production ratio).
    Keywords: Human capital accumulation, Public education, Public debt, Fiscal sustainability
    JEL: E62 H52 H63 I28
    Date: 2017–03

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