nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒10‒29
five papers chosen by
Georg Man

  1. A Blessing in Disguise? Market Power and Growth with Financial Frictions By Joachim Jungherr; David Strauss
  3. Does Capital Scarcity Matter? By Anusha Chari; Peter Blair Henry; Racha Moussa
  4. A note on risk sharing versus instability in international financial integration: When Obstfeld meets Stiglitz By Raouf Boucekkine; Benteng Zou
  5. On corporate borrowing, credit spreads and economic activity in emerging economies : An empirical investigation By Caballero, Julián; Fernández, Andrés

  1. By: Joachim Jungherr; David Strauss
    Abstract: Firm market power raises growth in the presence of financial frictions. The reason is that self financing becomes more effective if firm earnings are higher. We test this mechanism using Korean manufacturing data 1963-2003. We find that more concentrated sectors grow faster. This positive empirical relationship between concentration and growth gets weaker as credit becomes more abundant. Using a simple growth model, we study counterfactuals. The observed rise of concentration in Korea until the mid-1970s has increased manufacturing value added 1963-2003 on average by at least 0:6% per year. The effect of firm market power on worker welfare is ambiguous.
    Keywords: market power, financial frictions, growth
    JEL: L13 O11 O16
    Date: 2017–10
  2. By: Upper, Christian; Marconi, Daniela
    Abstract: We investigate the relationship between capital misallocation and financial development in six countries at different levels of development. We find that more developed financial systems perform better at allocating capital investment. If financial development is low, faster capital accumulation results in a worsening of allocative efficiency. This effect reverses for higher levels of financial development. Sectors with high R&D expenditures or high capital investment benefit most.
    JEL: O47 O16
    Date: 2017
  3. By: Anusha Chari; Peter Blair Henry; Racha Moussa
    Abstract: This paper quantifies the welfare impact of a permanent increase in the level of per capita income brought about by a temporary increase in the growth rate of GDP per capita following capital account liberalization. In the immediate aftermath of liberalization, and under a range of assumptions, differences between the autarkic and integrated equilibrium consumption paths are large. Yet the welfare impact of these differences is small when using infinite horizon consumption streams to compute welfare gains. The results suggest that a finite horizon framework may be more appropriate and policy-relevant for evaluating the welfare consequences of economic policy changes that induce temporary growth effects but have a permanent impact on the level of per capita incomes.
    JEL: F21 F30 F43 G15
    Date: 2017–10
  4. By: Raouf Boucekkine (Aix-Marseille University (IM_eRA and AMSE), CNRS and EHESS, and senior member of the Institut Universitaire de France); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: International risk sharing is one of the main arguments in favor of financial libera- lization. The pure risk sharing mechanism highlighted by Obstfeld (1994) implies that liberalization is growth enhancing for all countries as it allows the world port- folio to shift from safe low-yield capital to riskier high yield capital. This result is obtained under the assumption that the volatility figures for risky assets prevailing under autarky are not altered after liberalization. This note relaxes this assump- tion within the standard two-country model with intertemporal portfolio choices, formally incorporating the instability effect invoked by Stiglitz (2000). We show that putting together the pure risk sharing and instability effects in the latter set-up enriches the analysis and delivers predictions more consistent with the contrasted related empirical literature.
    Keywords: Optimal growth, financial liberalization, risk sharing, volatility,
    JEL: F21 G15 O16 O41
    Date: 2017
  5. By: Caballero, Julián; Fernández, Andrés
    Abstract: We document a considerable increase in foreign financing by the corporate sector in emerging economies (EMEs) since the early 2000s, mainly in the form of bond issuance, and claim that it has opened up an important channel by which external financial factors can drive economic activity in these economies. Such claim is substantiated by a strong negative relationship between economic activity and an external financial indicator that we construct for several EMEs using micro-level data on spreads of bonds issued by EMEs’ corporations in foreign capital markets. Three salient features characterize such a negative relationship. First, the financial indicator has considerable predictive power on future economic activity in these economies, even after controlling for other potential drivers of economic activity such as movements in sovereign risk and global financial risk, among others. Second, on average, an identified adverse shock to the financial indicator generates a large and protracted fall of real output growth in these economies, and between 11 to 20 percent of its forecast error variance is associated to this shock. Lastly, fluctuations in this indicator also respond strongly to shocks in global financial risk emanating from world capital markets, thereby implying that changes of our indicator also serve as a powerful propagating mechanism to changes in global investors’ appetite for risk.
    JEL: E32 E37 F34 F37 G15
    Date: 2017–10–17

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