nep-fdg 2017-06-25 papers

on Financial Development and Growth

Issue of 2017‒06‒25
two papers chosen by
Georg Man

Episodes of financial deepening: credit booms or growth generators? By Peter L. Rousseau; Paul Wachtel
Can Countries Rely on Foreign Saving for Investment and Economic Development? By Eduardo A. Cavallo; Barry Eichengreen; Ugo Panizza

Episodes of financial deepening: credit booms or growth generators?

By:	Peter L. Rousseau (Vanderbilt University); Paul Wachtel (New York University, Stern School of Business)
Abstract:	One strand of the economics literature addresses financial deepening as a precursor to economic growth. Another views it as a cause of financial crises. We examine historical data for 17 economies from 1870 to 1929 to distinguish episodes of growth induced by financial deepening from crises induced by credit booms. Cross-country panel regressions with five-year averages indicate that deepening episodes, defined as increases of more than thirty percent (and alternatively more than twenty percentage points) in the ratio of M2 to GDP over a ten year period, significantly enhanced the standard finance-growth dynamic, while deepening associated with financial crises sharply hindered it. We then describe some specific episodes of financial deepening in our sample.
Keywords:	finance-growth nexus, Atlantic economies, financial deepening, financial crisis
JEL:	E5 N1
Date:	2017–06–16
URL:	http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-17-00009&r=fdg

Can Countries Rely on Foreign Saving for Investment and Economic Development?

By:	Eduardo A. Cavallo; Barry Eichengreen; Ugo Panizza
Abstract:	A surprisingly large number of countries have been able to finance a significant fraction of domestic investment using foreign finance for extended periods. While many of these episodes are in low-income countries where official finance is more important than private finance, this paper also identifies a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, foreign savings are not a good substitute for domestic savings, since more often than not episodes of large and persistent current account deficits do not end happily. Rather, they end abruptly with compression of the current account, real exchange rate depreciation, and a sharp slowdown in investment. Summing over the deficit episode and its aftermath, growth is slower than when countries rely on domestic savings. The paper concludes that financing growth and investment out of foreign savings, while not impossible, is risky.
Keywords:	Foreign Saving, Saving Rate, Investment, Emerging countries, Capital inflow, GDP Growth, Exports, Exchange rates, Human Capital, Capital Markets, Domestic Investment, Foreign Saving
JEL:	O16 F32
Date:	2016–08
URL:	http://d.repec.org/n?u=RePEc:idb:brikps:95297&r=fdg

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