nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒12‒11
eight papers chosen by
Georg Man

  1. Capital misallocation and financial development: A sector-level analysis By Daniela Marconi; Christian Upper
  2. The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity By John (Jianqiu) Bai; Daniel Carvalho; Gordon M. Phillips
  3. The long-run real effects of banking crises: Firm-level investment dynamics and the role of wage rigidity By Wix, Carlo
  4. Modeling Energy Consumption, CO2 Emissions and Economic Growth Nexus in Ethiopia: Evidence from ARDL Approach to Cointegration and Causality Analysis By Kebede, Shemelis
  5. What difference does it make (when a middle-income country is caught in the trap)? An evidence-based survey analysis of the determinants of Middle-Income Traps By Eric Rougier; Riana Razafimandimby Andrianjaka
  6. The Macroeconomic Drivers of Stock Market Development: Evidence from Hong Kong By Ho, Sin-Yu; Odhiambo, Nicholas
  7. Japan; Financial Sector Assessment Program-Technical Note-Long-Term Challenges for Financial Intermediation By International Monetary Fund
  8. Macroeconomic implications of financial imperfections: a survey By Stijn Claessens; M Ayhan Kose

  1. By: Daniela Marconi; Christian Upper
    Abstract: This study investigates how financial development affects capital allocation across industries in a panel of countries at different stages of development (China, India, Mexico, Korea, Japan and the US) over the period 1980-2014. Following the approach proposed by Chari et al (2007) and Aoki (2012), we compute wedges for capital and labour inputs for 26 industrial sectors in the six countries and add them up to economy-wide measures of capital and labour misallocation. We find that more developed financial systems allocate capital investment more efficiently than less developed ones. If financial development is low, faster capital accumulation is associated with 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 from financial development. These effects are not only statistically significant, they are also large in economic terms.
    Keywords: factor allocation, total factor productivity, financial development
    JEL: E22 E23 O16 O47
    Date: 2017–11
  2. By: John (Jianqiu) Bai; Daniel Carvalho; Gordon M. Phillips
    Abstract: We provide evidence that the deregulation of U.S. state banking markets leads to a significant increase in the relative employment and capital growth of local firms with higher productivity and that this effect is concentrated among young firms. Using financial data for a broad range of firms, our analysis suggests that this effect is driven by a shift in the composition of local bank credit supply towards more productive firms. We estimate that this effect translates into economically important gains in aggregate industry productivity and that changes in the allocation of labor play a central role in driving these gains.
    JEL: G2 G21 G3 G31 G32 J01 J21 J24 L22 L23 L25 O11 O12
    Date: 2017–11
  3. By: Wix, Carlo
    Abstract: This paper studies the long-run effects of credit market disruptions on real firm outcomes and how these effects depend on nominal wage rigidities at the firm level. I trace out the long-run investment and growth trajectories of firms which are more adversely affected by a transitory shock to aggregate credit supply. Affected firms exhibit a temporary investment gap for two years following the shock, resulting in a persistent accumulated growth gap. I show that affected firms with a higher degree of wage rigidity exhibit a steeper drop in investment and grow more slowly than affected firms with more flexible wages.
    Keywords: Financial Crises,Bank Lending,Real Effects,Firm Investment,Wage Rigidity,Labor Hoarding
    JEL: E22 E24 E51 G01 G21 G31
    Date: 2017
  4. By: Kebede, Shemelis
    Abstract: Energy consumption is one of the important inputs to the production process. Energy consumption and energy supplied from fossil fuels in production process cause CO2 emissions and environmental deterioration. Due to this fact achieving economic development and environmental sustainability simultaneously is one of the most significant development challenges for Africa today. Formulation of sound economic development and environmental sustainability policy needs knowing the relationship among energy use, economic growth and environmental quality. This study examines the relationship among economic growth, energy consumption, financial development, trade openness, urbanization, population and CO2 emissions over the period of 1970–2014 in case of Ethiopia. The PP, ADF, KPSS, Zivot-Andrews and Clemente, Montanes and Reyes unit root tests were used to test the stationarity of the variables under consideration. The ARDL cointegration technique for establishing the existence of a long-run relationship and Toda-Yamamoto approach to determine the direction of causality between the variables were used. The results show that cointegration exists among the variables. Energy consumption, population, trade openness and economic growth have statistically significant positive impact on CO2 in the long-run while economic growth squared compacts CO2 emissions. This supports validity of the EKC hypothesis in Ethiopia. In the short-run urbanization and energy consumption intensify environmental degradation. Toda-Yamamoto granger causality results indicate the feedback relationship between energy consumption, CO2 emissions and urbanization. Financial development, population and urbanization cause economic growth while economic growth causes CO2 emissions. Causality runs from energy consumption to financial development, urbanization and population which in turn cause economic growth. Form the result, CO2 emissions extenuation policy in Ethiopia should focus on environmentally friendly growth, enhancing consumption of clean energy, incorporating the impact of population growth, urbanization, trade and financial development.
    Keywords: Growth, Energy, Financial development, Urbanization, CO2 emissions, Ethiopia
    JEL: C1 C18 E2 Q5
    Date: 2017–11–29
  5. By: Eric Rougier; Riana Razafimandimby Andrianjaka
    Abstract: Middle-Income Trap (MIT) is a growing concern for developing countries\' governments and development banks. This paper uses a mixed approach to identify episodes of MIT in a panel of 132 countries over 1970-2010 and tests empirically three groups of explaining factors advanced by the recent literature on this issue: growth and accumulation regimes, transformation of trade and productive structures and distributional conflicts. We find that the demographic dividend, the patterns of productive change and diversification, skill misallocation, and conflicts help explain why some middle countries underwent persistent growth slowdowns. On the contrary, such frequently evoked explanations as physical and human capital accumulation, democracy, inequality and redistribution did not help differentiating between the middle-income countries caught in the trap and the others. Cumulative effects are also identified since the weakness of employment and innovation capacities dampens the positive effect of human capital and workforce on medium-run growth.
    Keywords: Middle-Income Trap, Growth Transitions, Growth Determinants, Growth Slowdown
    JEL: C33 O40 O54
    Date: 2017
  6. By: Ho, Sin-Yu; Odhiambo, Nicholas
    Abstract: This paper examines the macroeconomic drivers of stock market development in Hong Kong during the period 1992Q4 to 2016Q3. Specifically, it investigates the impact of banking sector development, economic growth, the inflation rate, the exchange rate, trade openness and stock market liquidity on stock market development. By employing autoregressive distributed lag (ARDL) bounds testing procedure, we find that banking sector development and economic growth have positive impacts on stock market development, whereas the inflation rate and the exchange rate have negative impacts on stock market development both in the long and short run. In addition, the results show that trade openness has a positive long-run impact but a negative short-run impact on stock market development. Policy recommendations are provided based on these findings.
    Keywords: macroeconomic drivers, determinants, stock market development, Hong Kong, ARDL bounds testing
    Date: 2017–11
  7. By: International Monetary Fund
    Abstract: Sustained demographic change can have potentially significant effects on the economy and the financial system. Aging can affect financial intermediation through its effects on potential growth, on the term structure of interest rates and risk premiums in general, and on the demand for retirement-related products and services. At the same time, in an aging society, the financial sector has a particularly important role to play in helping to foster growth and productivity. This note analyzes and quantifies the effect of aging in Japan—both at the national and regional levels—on the nature of financial intermediation and concludes that the relative role of banks is likely to diminish.
    Keywords: Asia and Pacific;Japan;
    Date: 2017–09–18
  8. By: Stijn Claessens; M Ayhan Kose
    Abstract: This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers' balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasises the implications of changes in financial intermediaries' balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain.
    Keywords: asset prices, balance sheets, credit, financial accelerator, financial intermediation, financial linkages, international linkages, leverage, liquidity, macrofinancial linkages, output, real-financial linkages
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–11

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