nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒10‒01
five papers chosen by
Georg Man

  1. Leveraged Growth: Endogenous Money and Speculative Credit in a Stock-flow Consistent Measure of Output By Jacob Assa
  2. Financial structure and macroeconomic volatility: a panel data analysis By Emiel van Bezooijen; Jacob Bikker
  3. Financial Inclusion and Women Entrepreneurship: Evidence from Mexico By Fozan Fareed; Mabel Gabriel; Patrick Lenain; Julien Reynaud
  4. East Asian Financial and Economic Development By Randall Morck; Bernard Yeung
  5. Financial Development, Industrialisation, Urbanisation and the Role of Institutions: A Comparative Analysis between India and China By Shahbaz, Muhammad; Bhattacharya, Mita; Kumar, Mantu

  1. By: Jacob Assa (United Nations - OHRLLS)
    Abstract: Modern Monetary Theory (MMT) as well as Stock-Flow Consistent (SFC) modelling have both had significant implications for economic theory in recent years. Neither, however, had any meaningful impact on the key measurement of output, Gross Domestic Product (GDP). While balance sheets have been nominally included in national accounting systems since 1968, main aggregates such as GDP are still blind to the creation and flow of credit (and hence debt). The financial sector is only presented in GDP as a provider of services, not as a producer of credit and thus money. Following Schumpeter's (and Bezemer's) functional differentiation of credit, this paper separates finance into two parts - credit to the productive sectors and credit for speculation (i.e. for purchasing financial assets and real-estate). The former grows at the same rate as GDP, while the latter grows faster, increasing aggregate leverage. A systemic leverage index is then constructed from flow-of-funds data for the US (1960-2015), and used to render real GDP stock-flow consistent. Debt-adjusted GDP is theoretically and methodologically more consistent than GDP, and also correlates better with aggregate employment. The paper concludes by discussing the implications of debt-adjusted output for the trend and volatility of growth, as well as some thoughts on the gap between measurement and theory in economics.
    Keywords: Modern Money Theory, Stock-flow consistency, Functional differentiation of credit, speculation, credit, endogenous money, aggregated demand
    JEL: E01 E12 E23 E44 G20 O42 O47
    Date: 2017–09
  2. By: Emiel van Bezooijen; Jacob Bikker
    Abstract: In 2015, the European Commission (EC) launched its action plan for the creation of a European Capital Markets Union. The EC aims to return the European economy to sustainable growth and to enhance its shock absorbing capacity by reducing the reliance on bank finance and stimulating financial deepening and cross-border integration of Europe's capital markets. Financial diversification and integrated European capital markets are expected to improve risk sharing among households, supporting economic stability. However, the economic literature reveals a lack of theoretical and empirical consensus on the superiority of either a bank-based or a market-based financial system in promoting growth or reducing macroeconomic volatility. This paper is the first to include bond markets in its financial structure indicators, besides stock markets and bank lending. Using panel data on 55 countries between 1975 and 2014 and three different measures of financial structure, we investigate the effect of the structure of the financial system on the volatility of output and investment growth as well as their cyclical components. We do not find evidence that market-based financial structures dampen volatility of output or overall investment. Increase of the stock market size relative to that of the banking sector has a significant positive effect on the business cycle volatility of investments.
    Keywords: financial development; financial system structure; macroeconomic volatility; market-based finance; bank-based finance; capital market integration; business cycle
    JEL: G15 G18
    Date: 2017–09
  3. By: Fozan Fareed (OECD); Mabel Gabriel (OECD); Patrick Lenain (OECD); Julien Reynaud (OECD)
    Abstract: Financial inclusion and women entrepreneurship concern policymakers because of their impact on job creation, economic growth and women empowerment. Women in Mexico do engage in paid work but many of them work in the informal sector because they lack opportunities to work in the formal sector. Moreover, financial exclusion rate in Mexico remains the highest amongst OECD countries, affecting women in particular. This paper uses an individual-based panel dataset over the period 2009-2015 to examine the determinants of women entrepreneurship in Mexico and to determine the relationship between women entrepreneurship and financial inclusion across informal and formal work and across economic sectors. The results suggest that financial inclusion is positively linked with entrepreneurship and it can open up economic opportunities for women entrepreneurs. Various financial access points like banking branches, POS terminals, banking agents, ATMs and microfinance banks can be a gateway to the use of additional financial services which can allow businesses development through access to credit facilities. However, the positive relationship between women entrepreneurship and financial inclusion does not hold for women entrepreneurs working in the informal sector or women working in the commerce sector, highlighting lower entry barriers, including financial, in the informal sector and problems pertaining to financial illiteracy. Results also highlight that the probability of a women being an entrepreneur in the informal sector is higher than in the formal sector. Education, age, income, marital status (married or divorced), and income level at the municipality level are amongst other significant determinants which are positively linked with women entrepreneurship. The results also highlight the existence of gender disparity in the status of entrepreneurship across formal and informal work in Mexico. On average, women are about 56% less likely to be entrepreneurs in the formal sector and 63% more likely to be entrepreneurs in the informal sector, as compared to men, after taking into account other relevant individual and municipality level characteristics that are important in explaining entrepreneurship.
    Keywords: financial access, financial exclusion, Financial inclusion, informality, SMEs, women entrepreneurship
    JEL: F14 F23 L16 O24
    Date: 2017–09–27
  4. By: Randall Morck; Bernard Yeung
    Abstract: Japan, an isolated, backward country in the 1860s, industrialized rapidly to become a major industrial power by the 1930s. South Korea, among the world’s poorest countries in the 1960s, joined the ranks of First World economies in little over a single generation. China now seems poised to follow a similar trajectory. All three cases highlight the importance of marginalized traditional elites, intensive early investment in education, a degree of economic openness, free markets, equity financing, early-stage coordination of firms in diverse industries via arrangements such as business groups, and political institutions capable of curbing the power of families grown wealthy in early-stage rapid development to make way for prosperity sustained by efficient resource allocation to high-productivity firms.
    JEL: G0 N25 N35 O1 O16 O53 P1 P11 P5
    Date: 2017–09
  5. By: Shahbaz, Muhammad; Bhattacharya, Mita; Kumar, Mantu
    Abstract: This paper explores the impact of industrialisation and urbanisation on financial development by incorporating the role of institutional quality for India and China over the period of 1970-2013. We apply the bounds testing approach, which accommodates structural breaks, in order to test the presence of cointegration between the variables. The results show the existence of long-run dynamics between the series. Furthermore, we establish that industrialisation and urbanisation lead to financial development and that the lack of institutional quality and government size reduces financial development. Trade openness enhances Indian financial development but hinders Chinese financial development. The causality analysis depicts the bidirectional causality between urbanisation (industrialisation) and financial development for India. In the case of China, the urbanisation Granger causes financial development, and the feedback effect exists between industrialisation and financial development. Institutional quality is found to be the core factor in enhancing financial development in both countries with a feedback effect.
    Keywords: India, China, Financial Development, Institutions
    JEL: A1
    Date: 2017–09–02

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