nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒10‒15
four papers chosen by
Georg Man

  1. Government Debt and Growth: The Role of Liquidity By Mathieu Grobéty
  2. Schumpeterian Banks: Credit Reallocation and Capital Requirements By Kogler, Michael; Keuschnigg, Christian
  3. Patterns of international capital flows and their implications for developing countries By Mika Nieminen
  4. Financial Development and Pre-historic Geographical Isolation: Global Evidence By Oasis Kodila-Tedika; Simplice Asongu; Matthias Cinyabuguma; Vanessa Tchamyou

  1. By: Mathieu Grobéty
    Abstract: How does government debt affect long-run economic growth? A prominent strand of theoretical literature suggests that government debt has a negative effect on growth. Another strand argues that government debt can foster growth by enhancing the supply of liquid assets or collateral. We empirically investigate the liquidity channel of government debt and apply the difference-in-differences methodology of Rajan and Zingales (1998) on a sample of 28 manufacturing industries across 39 developing and developed countries. We provide evidence that industries with greater liquidity needs tend to grow disproportionately faster in countries with higher levels of government debt. The positive liquidity effect of government debt on industry growth stems from domestic debt, not external debt. We perform a battery of robustness checks and show that our results are robust to using instrumental variables and controlling for many competing channels.
    Keywords: Government Debt, Growth, Liquidity, Non-linearity
    JEL: H63 D92 O16 G21
    Date: 2017
  2. By: Kogler, Michael; Keuschnigg, Christian
    Abstract: Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements. This results in insufficient credit reallocation across sectors and a distorted capital allocation. Reducing the cost of equity and tightening capital requirements can mitigate distortions.
    JEL: D92 G21 G28 G33
    Date: 2017
  3. By: Mika Nieminen
    Abstract: According to a standard economic theory, capital should flow from rich capitalabundant countries to poor capital-scarce countries. However, a reverse pattern has prevailed in the world economy. This is the so-called Lucas paradox. In addition, it has been shown that counterintuitively there is negative correlation between capital inflow and productivity growth across developing countries. This is the so-called allocation puzzle. This survey attempts to shed light on the following questions: 1) What are the patterns of international capital flows in the world economy? 2) What are the most plausible explanations for these patterns? 3) What are the possible implications of these developments for developing countries?
    Date: 2017
  4. By: Oasis Kodila-Tedika (Université de Kinshasa, RDC); Simplice Asongu (Yaoundé, Cameroon); Matthias Cinyabuguma (The World Bank Group); Vanessa Tchamyou (Yaoundé, Cameroon)
    Abstract: Using cross-country differences in the degree of isolation before the advent of technologies in sea and air transportation, we assess the relationship between geographic isolation and financial development across the globe. We find that pre-historic geographical isolation has been beneficial to development because it has contributed to contemporary cross-country differences in financial intermediary development. The relationship is robust to alternative samples, different estimation techniques, outliers and varying conditioning information sets. The established positive relationship between geographic isolation and financial intermediary development does not significantly extend to stock market development.
    Keywords: Financial development; Isolation; Agglomeration; Globalization
    JEL: F15 G15 N7 O16 O50
    Date: 2017–01

This nep-fdg issue is ©2017 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.