nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒06‒04
three papers chosen by
Georg Man

  1. Finance and Growth: Household Savings, Public Investment, and Public Health in Late Nineteenth-Century New Jersey By Howard Bodenhorn
  2. What is the link between financial development and income inequality? evidence from Malaysia By Ahmed, Azleen Rosemy; Masih, Mansur
  3. Default Cycles By Wei Cui; Leo Kaas

  1. By: Howard Bodenhorn
    Abstract: Saving is essential to the health of economies because it provides the wherewithal for investment. In the late nineteenth century, saving was also essential to the health of urban working-class households. This study brings together information from surveys of household spending and saving, reports of savings banks and insurance companies, water and sewer authorities, and health commissioners to illuminate the connections between household savings and health improvements. Contemporary financial institutions positively influenced economic growth by allocating capital to highly productive employments, including public infrastructure. Specifically, investments in waterworks contributed to the long-run decline in typhoid infection, which improved worker health and productivity.
    JEL: I15 N31
    Date: 2017–05
  2. By: Ahmed, Azleen Rosemy; Masih, Mansur
    Abstract: This paper studies the long run relationship between financial development and income inequality in Malaysia over the period of 1970-2007. For the last 45 years, Malaysian income inequality has been decreasing from a height of 0.56 (Gini coefficient) in 1976 to 0.4 in 2014 while its economy and financial sector especially the banking industry has been expanding. The issue of importance is to investigate whether in a developing economy, the financial sector plays a role in reducing income inequality by mobilising and allocating savings into productive investments. We have employed the auto regressive distributed lag (ARDL) bound testing approach and the error correction mechanism to examine the existence of long run relationship, while variance decomposition (VDC) technique is used to provide Granger causal relationship between the variables. The cointegration tests show that there is a long run relationship between financial development, economic growth, trade openness and income inequality in Malaysia. However, financial development itself is found to be not statistically significant in influencing income inequality during the sample period. This finding is similar to Law & Tan’s (2009) findings over a shorter period 1980-2000. However, the VDC finds that financial development can be a tool for the government to employ to reduce income inequality. This paper also provides evidence that trade openness helps reduce income inequality. In terms of policy, enhancing financial access that would steer the development of financial system towards a pro-growth and pro-poor direction is needed to ensure that financial development fully supports the reduction of income inequality in Malaysia.
    Keywords: Financial development, income inequality, Malaysia, ARDL
    JEL: C58 E44 G15
    Date: 2017–05–11
  3. By: Wei Cui (Centre for Macroeconomics (CFM); University College London (UCL)); Leo Kaas (University of Konstanz)
    Abstract: Recessions are often accompanied by spikes of corporate default and prolonged declines of business credit. This paper argues that credit and default cycles are the outcomes of variations in self-fulfilling beliefs about credit market conditions. We develop a tractable macroeconomic model in which leverage ratios and interest spreads are determined in optimal credit contracts that reflect the expected default risk of borrowing firms. We calibrate the model to evaluate the impact of sunspots and fundamental shocks on the credit market and on output dynamics. Self-fulfilling changes in credit market expectations trigger sizable reactions in default rates and generate endogenously persistent credit and output cycles. All credit market shocks together account for about 50% of the variation of U.S. output growth during 1982-2015.
    Keywords: Firm default, Financing constraints, Credit spreads, Sunspots
    JEL: E22 E32 E44 G12
    Date: 2017–05

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