nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒05‒21
seven papers chosen by
Georg Man

  1. The relationship between energy consumption, financial development and economic growth: an evidence from Malaysia based on ARDL By Malik, Meheroon Nisa Abdul; Masih, Mansur
  2. Financialisation risks and economic performance By Jérôme Creel; Paul Hubert; Fabien Labondance
  3. Financial Frictions and the Rule of Law By Ashantha Ranasinghe; Diego Restuccia
  4. Finance and the Misallocation of Scientific, Engineering and Mathematical Talent By Giovanni MARIN; Francesco Vona
  5. The microeconomic origins of the Spanish boom By Enrique Moral-Benito
  6. Going With the Flows: New Borrowing, Debt Service and the Transmission of Credit Booms By Mathias Drehmann; Mikael Juselius; Anton Korinek
  7. Does Public Debt Crowd Out Corporate Investment? International Evidence By Yi Huang; Ugo Panizza; Richard Varghese

  1. By: Malik, Meheroon Nisa Abdul; Masih, Mansur
    Abstract: This study aims to examine the short-run and long-run relationship between economic growth, energy consumption, financial development, capital formation and population by using data set of Malaysia for the period 1971–2014. An emerging economy like Malaysia has high energy consumption which is intensified by its growing population. Economic growth and energy consumption in Malaysia have been rising over the past several years. The motivation to this study is related to four policy objectives of Malaysia; economic growth, financial development, energy conservation and reduction on pollution. The auto regressive distributed lag (ARDL) bounds testing approach to test the long run relationship among the variables, while short run dynamics were investigated using the Vector Error Correction Model (VECM). Variance decomposition (VDC) technique was used to provide Granger causal relationship between the variables. The findings suggest that energy consumption is influenced by economic growth and financial development, both in the short and the long run. The population–energy relationship however only holds in the long run. The results have important policy implications for balancing economic growth vis-à-vis energy consumption for Malaysia, and other emerging nations to explore new and alternative sources of energy to meet the rising demand of energy to sustain economic growth.
    Keywords: GDP, Energy consumption, Financial Development, Capital, Population Growth, Malaysia
    JEL: C58 E44
    Date: 2017–12–30
  2. By: Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: Drawing on European Union data, this paper assesses the long-standing mainstream view that financialisation improves growth. We measure financialisation with private credit to GDP and capture characteristics of banking sector fragility with the ratio of credit to deposits and the ratio of bank capital to assets. We test the impact of these variables on four measures of economic performance: the growth rates of GDP per capita, consumption per capita, investment and inequality. We observe that credit has no effect on economic performance. However, the potential riskiness of the banking sector measured by the ratio of credit to deposits decreases GDP per capita and contributes to increasing inequality whereas the ratio of capital to assets has a negative impact on GDP per capita growth through its negative effect on investment. This effect is driven by countries with low GDP per capita. We also find that the potential side effects of excessive financialisation have a negative effect on growth.
    Keywords: Private credit; Banking sector fragility; Non performing loans; Bank crisis
    Date: 2017–10
  3. By: Ashantha Ranasinghe; Diego Restuccia
    Abstract: Using cross-country micro establishment-level data we document that crime and lack of access to finance are two major obstacles to business operation in poor and developing countries. Using an otherwise standard model of production heterogeneity that integrates institutional differences in the degree of financial development and the rule of law, we quantify the effects of these institutions on aggregate outcomes and economic development. The model accounts for the patterns across establishments in access to finance and crime as obstacles to their operation. Weaker financial development and rule of law have substantial negative effects on aggregate output, reducing output per capita by 50 percent. Weak rule-of-law institutions substantially amplify the negative impact of financial frictions. While financial markets are crucial for development, an essential precondition to reap the gains from financial liberalization is that property rights are secure.
    JEL: O1 O11 O4 O43 O5
    Date: 2018–04
  4. By: Giovanni MARIN; Francesco Vona (Observatoire français des conjonctures économiques)
    Abstract: The US financial sector has become a magnet for the brightest graduates in the science, technology, engineering and mathematical fields (STEM). We provide quantitative bases for this well-known fact and illustrate its consequences for the productivity growth in other sectors over the period 1980-2014. First, we find that the share of STEM talents grew significantly faster in finance than in other key STEM sectors such as high-tech, and this divergent pattern has been more evident for STEM than for general skills and more pronounced for investment banking. Second, this trend did not reverse after the Great Recession, and a persistent wage premium is found for STEM graduates working in finance and especially in typical financial jobs at the top of the wage distribution. Third, the brain drain of STEM talents into finance has been associated with a cumulative loss of labor productivity growth of 6.6% in the manufacturing sectors. Our results suggest that increasing the number of STEM graduates may not be enough to reignite sluggish economic growth without making their employment in finance more costly.
    Keywords: Finance; Skills; STEM workers; Brain drain; Productivity
    JEL: Q52 Q48 H23
    Date: 2017–11
  5. By: Enrique Moral-Benito (Banco de España)
    Abstract: The Spanish growth experience over the 1995-2007 period was characterized by the remarkable surge in employment and investment as well as the dismal evolution of productivity. These macroeconomic fluctuations were coupled with an unprecedented credit boom fueled by a housing bubble. This article reviews a line of research that investigates the connection between these developments using micro-level data on Spanish firms and banks. The evidence suggests that the abundant availability of credit, partially induced by the real estate bubble, and its propagation through the Spanish production network explain a sizable part of the massive accumulation of labor and capital. Also, the deterioration in the allocation of resources across firms is the main responsible of the fall in aggregate productivity. The allocation of credit across firms and municipalities, the softening of banks lending standards, and the low productivity of Spanish firms can partly explain this deterioration.
    Keywords: Spain, firm level data, TFP, misallocation, input-output linkages
    JEL: D24 O11 O47 E44 G21 L25
    Date: 2018–05
  6. By: Mathias Drehmann; Mikael Juselius; Anton Korinek
    Abstract: Traditional economic models have had difficulty explaining the non-monotonic real effects of credit booms and, in particular, why they have predictable negative after-effects for up to a decade. We provide a systematic transmission mechanism by focusing on the flows of resources between borrowers and lenders, i.e. new borrowing and debt service. We construct the first cross-country dataset of these flows for a panel of household debt in 16 countries. We show that new borrowing increases economic activity but generates a pre-specified path of debt service that reduces future economic activity. The protracted response in debt service derives from two key analytic properties of credit booms: (i) new borrowing is auto-correlated and (ii) debt contracts are long term. We confirm these properties in the data and show that debt service peaks on average four years after credit booms and is associated with significantly lower output and higher crisis risk. Our results explain the transmission mechanism through which credit booms and busts generate non-monotonic and long-lasting aggregate demand effects and are, hence, crucial for macroeconomic stabilization policy.
    JEL: E17 E44 G01
    Date: 2018–04
  7. By: Yi Huang (IHEID, Graduate Institute of International and Development Studies); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva and CEPR); Richard Varghese (IHEID, Graduate Institute of International and Development Studies)
    Abstract: Using data for advanced and emerging economies, we show that there is a negative correlation between public debt and corporate investment. Industry-level regressions show that high levels of government debt are particularly damaging for industries that need more external ?financial resources. Firm-level regressions show that government debt increases the sensitivity of corporate investment to cash ?flow. These results indicate that the relationship between public debt and investment is likely to be causal and that public debt crowds out corporate investment by tightening credit constraints.
    Keywords: Investment, Public Debt, Crowding Out, Credit Constraints
    JEL: E22 E62 H63
    Date: 2018–05

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