nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒04‒16
seven papers chosen by
Georg Man

  1. Financial develpoment and economic growth in Brazil: A non-linear ARDL approach By Clement Moyo; Hlalefang Khobai; Nwabisa Kolisi; Zizipho Mbeki
  2. Annuity Markets and Capital Accumulation By Shantanu Bagchi; James Feigenbaum
  3. Interest rate reforms and economic growth: the savings and investment channel By Clement Moyo; Pierre Le Roux
  4. Counterintuitive facts regarding household saving in China: the saving glut By Kevin Luo; Tomoko Kinugasa
  5. Financial Development and Inclusion in the Caribbean By Chuan Li; Joyce Wong
  6. Credit supply and productivity growth By Francesco Manaresi; Nicola Pierri
  7. Inflation and Fertility in a Schumpeterian Growth Model: Theory and Evidence By He, Qichun

  1. By: Clement Moyo (Department of Economics, Nelson Mandela University); Hlalefang Khobai (Department of Economics, Nelson Mandela University); Nwabisa Kolisi (Department of Economics, Nelson Mandela University); Zizipho Mbeki (Department of Economics, Nelson Mandela University)
    Abstract: Financial intermediation through the banking system plays an important role in economic development through the allocation of savings, thus improving productivity, and ultimately increasing the rate of economic growth. This paper examines the interrelationships between financial development and economic growth using the Nonlinear Autoregressive Distributed Lag (NARDL) model for Brazil. The time component of the study’s database is 1985 – 2015 inclusive. The study focused on the banking sector and stock market indicators of financial developments. The empirical results suggest that the banking sector measures of financial development have a negative relationship with economic growth while the financial development indicators representing stock market development are positively related to economic growth. The study also established an evidence of a long run and short run asymmetric relationship between financial development and growth. The empirical results open new insights for policy makers for long run and sustainable economic development.
    Keywords: Financial development, economic growth, Non-linear ARDL, Brazil.
    JEL: C13 C22 G20 G21
    Date: 2018–03
  2. By: Shantanu Bagchi (Department of Economics, Towson University); James Feigenbaum (Department of Economics, Utah State University)
    Abstract: We examine how the absence of annuities in financial markets affects capital accumulation in a two-period overlapping generations model. Our findings indicate that the effect on capital is ambiguous in general equilibrium, because there are two competing mechanisms at work. On the one hand, the absence of annuities increases the price of old-age consumption relative to the price of early-life consumption. This induces a substitution effect that reduces saving and capital, and an income effect that has the opposite effect as households want to consume less when young, causing them to save more. On the other hand, accidental bequests originate from the assets of the deceased under missing annuity markets. The bequest received in early life always has a positive income effect on saving, but the bequest received in old age, conditional on survival, is effectively a partial annuity with both substitution and income effects. We find that when the desire to smooth consumption is high, the income effects dominate, so the capital stock always increases when annuity markets are missing. However, when the desire to smooth consumption is low, the substitution effects dominate, and the capital stock decreases with missing annuity markets.
    Keywords: Mortality risk, frictionless annuities, accidental bequests, savings, capital stock.
    JEL: D52 E21
    Date: 2018–04
  3. By: Clement Moyo (Department of Economics, Nelson Mandela University); Pierre Le Roux (Department of Economics, Nelson Mandela University)
    Abstract: The 2008/2009 global financial crisis has re-ignited the debate around financial reforms with contrasting views with regards to the impact of financial reforms on economic growth. This study examines the impact of interest rate reforms on economic growth through savings and investments in SADC countries for the period 1990-2015. Three specifications are used for the analysis; the first one determines the influence of interest rate reforms on savings, the second one analyses the effect of savings on investments while the third one examines whether investments have a positive impact on economic growth. The Pooled Mean Group (PMG) estimation technique is employed for analysis. Furthermore, the ARDL bounds tests are conducted for the individual countries to test for cointegration. The results show that cointegration is detected in most countries for each one of the three specifications. Also, interest rate reforms have a positive impact on economic growth through savings and investments. The study therefore recommends that market forces should be allowed to determine real interest rates and furthermore, real interest rates maintained at artificially low levels may harm economic growth.
    Keywords: Interest rate reforms, economic growth, SADC, savings, investments, PMG.
    JEL: C50 E20 E62
    Date: 2018–03
  4. By: Kevin Luo (Graduate School of Economics, Kobe University); Tomoko Kinugasa (Graduate School of Economics, Kobe University)
    Abstract: This study begins by confirming that China has been in a state of overaccumulation over the past decade. Against this backdrop, we empirically investigate the underlying determinants of Chinese household saving, and present both intuitive and distinct insights. Considering that overaccumulation has become a major threat to China's economic performance, we find that certain policies and phenomena, which are usually regarded as positive factors (e.g., the SOE reform), are primarily responsible for China's excess saving, and those usually deemed to be negative factors (e.g., the real estate bubble), have essentially mitigated the surplus saving.
    Keywords: China; Household saving; Over-accumulation; GMM estimator; Policy design
    JEL: C33 D12 E21 G28
    Date: 2018–04
  5. By: Chuan Li; Joyce Wong
    Abstract: Many Caribbean financial systems are relatively well developed for their size but benefits are concentrated in a small part of the population. In several large countries, the financial development levels are below what is warranted by that country’s own macroeconomic fundamentals. SMEs, in particular, remain severely credit constrained, and data to inform better analysis remains scarce. Using available data, this paper takes stock of the current state of financial development and inclusion in the Caribbean region and, based on a quantitative general equilibrium model, examines potential trade-offs between growth, inequality, and financial stability—all critical considerations when policies are designed. A case study for Jamaica is examined in detail.
    Date: 2018–03–13
  6. By: Francesco Manaresi (Bank of Italy); Nicola Pierri (Stanford University)
    Abstract: We study the impact of bank credit supply on firm output and productivity. By exploiting a matched firm-bank database which covers all the credit relationships of Italian corporations over more than a decade, we measure idiosyncratic supply-side shocks to firms' credit availability. We use our data to estimate a production model augmented with financial frictions and show that an expansion in credit supply leads firms to increase both their inputs and their output (value added and revenues) for a given level of inputs. Our estimates imply that a credit crunch will be followed by a productivity slowdown, as experienced by most OECD countries after the Great Recession. Quantitatively, the credit contraction between 2007 and 2009 could account for about a quarter of the observed decline in Italy's total factor productivity growth. The results are robust to an alternative measurement of credit supply shocks that uses the 2007-08 interbank market freeze as a natural experiment to control for assortative matching between borrowers and lenders. Finally, we investigate possible channels: access to credit fosters IT-adoption, innovation, exporting, and the adoption of superior management practices.
    Keywords: credit supply, productivity, export, management, it adoption
    JEL: D22 D24 G21
    Date: 2018–03
  7. By: He, Qichun
    Abstract: This study explores a novel channel for monetary policy to impact growth and welfare---through fertility choice. In a scale-invariant Schumpeterian growth model with endogenous fertility and a cash-in-advance constraint on consumption, we find a positive effect of an increase in the nominal interest rate on fertility. The increase in fertility decreases labor supplied to production and R&D, which in turn decreases long-run growth. Calibration shows that long-run growth increases 0.12% by reducing the nominal interest rate from 9.6% to 0%, and the welfare gain is equivalent to a permanent increase in consumption of 3.14%. As an empirical test, we build panel data for 12 advanced countries during 2000--2014. We use the degree of central bank independence and money growth as the instruments for inflation. We find that the effect of inflation on population growth is positive and significant in instrumental variables estimation. Our results remain robust to using birth rate or fertility rate as the dependent variable. An increase in annual inflation of 1 percentage point would bring an increase of 0.06 percentage point in the annual growth of the total population. Our empirical findings provide support for our theory.
    Keywords: Monetary policy; fertility; economic growth; panel data
    JEL: J1 O31 O42
    Date: 2018–03

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