nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒06‒11
seven papers chosen by
Georg Man

  1. The Nonlinear Relationship between Economic growth and Financial Development By Balázs Egert; Fredj Jawadi
  2. Debt-Ridden Borrowers and Economic Slowdown (Latest version) By Keiichiro Kobayashi; Daichi Shirai
  3. Systemic Crisis and Growth Revisited: Has the Global Financial Crisis Marked a New Era? By Sven Steinkamp; Frank Westermann
  4. R&D financing and growth By Luca, Spinesi; Mario, Tirelli
  5. Micro and macro policies in the Keynes +Schumpeter evolutionary models By Giovanni Dosi; Mauro Napoletano; Andrea Roventini; Tania Treibich
  6. Sharp Instrument: A Stab at Identifying the Causes of Economic Growth By Reda Cherif; Fuad Hasanov; Lichen Wang
  7. Financial Globalisation and Economic Growth in South Asia. By Bhanumurthy, N R; Kumawat, Lokendra

  1. By: Balázs Egert; Fredj Jawadi
    Abstract: This paper studies the relationship between financial development and economic growth in a large sample of developing, emerging and advanced economies and on a separate, longer sample including only OECD countries over the recent period. Estimation results based on nonlinear threshold regression models do not confirm the too-much-finance-is-bad hypothesis, especially if the cross-country variation in the data is accounted for. We cannot indeed identify a tipping point beyond which financial development has a negative relation to economic development. What we see at best is that the positive effect of finance declines at higher levels of finance. Our results also show that banking and market finance are complementary. The positive effect of stock market deepening is larger when banking finance is more pronounced (and the other way around). But the thresholds above which complementarity kicks in are rather low. Finally, our results indicate that finance has a stronger positive effect in more developed countries. At the same time, the positive effect of finance is weaker in countries with lower trade openness. This may suggest that more open economies have access to alternative sources of external financing.
    Keywords: financial development, economic growth, nonlinearity, threshold effects.
    JEL: C2 G15
    Date: 2018
  2. By: Keiichiro Kobayashi; Daichi Shirai
    Abstract: Economic growth slows for an extended period after a financial crisis. We construct a model in which the one-time buildup of debt can depress the economy persistently even when there is no shock on financial technology. We consider the debt dynamics of a firm under an endogenous borrowing constraint. When the initial debt is large, the borrowing constraint binds tight and production is inefficient for an extended period. A firm is called debt-ridden when it owes the maximum sustainable amount of debt. A debt-ridden firm pays all income every period as the interest payment on the debt. A noticeable result in the deterministic case is that a debt-ridden firm continues inefficient production permanently. Further, if the initial debt exceeds a certain threshold, the firm chooses to increase borrowing and become debt-ridden intentionally. The emergence of a substantial number of debt-ridden firms lowers economic growth persistently by reducing the growth rate of aggregate productivity. As lenders have no incentive to reduce debt, a policy intervention that provides debtridden borrowers with relief from excessive debt may thus be necessary to restore economic growth.
    Date: 2018–01
  3. By: Sven Steinkamp (Institute of Empirical Economic Research, Osnabrueck University, D-49069 Osnabrueck, Germany); Frank Westermann (Institute of Empirical Economic Research, Osnabrueck University, D-49069 Osnabrueck, Germany)
    Abstract: Occasional crises have been shown to be part of growth enhancing mechanism (see Rancière, Tornell and Westermann, 2008). In this paper, we document that neither the stereotypical case study of India vs. Thailand, nor the benchmark growth-regression in this earlier research support this result anymore when updating the sample by one decade that includes the Global Financial Crisis, 2007/8. We analyze the time-varying nature of this relationship in rolling regressions and an historical dataset. In the subset of countries with enforceability problems, we find that the link between occasional crisis, measured by the negative skewness of credit growth, and per-capita output growth still remains intact.
    Keywords: Long-Term Growth; Systemic Crisis; Financial Liberalization
    JEL: F34 O43 G01
    Date: 2018–05–29
  4. By: Luca, Spinesi; Mario, Tirelli
    Abstract: R&D investment are an important engine of growth and development. Yet economists have often claimed underinvestment, also due to the asymmetric information between inside investors and outside investors and financiers, and the consequent capital and financial market imperfections. Some recent empirical evidence robustly supports these claims. Motivated by this evidence, we study the effects of asymmetric information and financial frictions on R&D investment within a dynamic GE economy of Shumpeterian tradition. The model and equilibrium concept we propose is rich enough to represent investment and innovation decisions, financial decisions and decisions regarding technology adoption/diffusion through patent licensing. Qualitative predictions indicate that the financial policy of the firm matters in explaining both entrepreneurial production and innovation decisions. Young R&D-intensive firms might rely more heavily on internal sources and equity than on debt financing, relatively to what would otherwise be observed in absence of frictions. These findings contribute to explain the type of financial hierarchy recently highlighted in the empirical studies.
    Keywords: Innovation, R&D, Shumpeterian growth, firm financial structure, asymmetric information, financial markets, general equilibrium.
    JEL: D5 D53 D92 O31 O33 O34 O4
    Date: 2018–04–30
  5. By: Giovanni Dosi (Laboratory of Economics and Management); Mauro Napoletano (Observatoire français des conjonctures économiques); Andrea Roventini (Laboratory of Economics and Management (LEM)); Tania Treibich (Maastricht University)
    Abstract: Abstract This paper presents the family of the Keynes+Schumpeter (K+S, cf. Dosi et al, J Econ Dyn Control 34 1748–1767 2010, J Econ Dyn Control 37 1598–1625 2013, J Econ Dyn Control 52 166–189 2015) evolutionary agent-based models, which study the effects of a rich ensemble of innovation, industrial dynamics and macroeconomic policies on the long-term growth and short-run fluctuations of the economy. The K+S models embed the Schumpeterian growth paradigm into a complex system of imperfect coordination among heterogeneous interacting firms and banks, where Keynesian (demand-related) and Minskian (credit cycle) elements feed back into the meso and macro dynamics. The model is able to endogenously generate long-run growth together with business cycles and major crises. Moreover, it reproduces a long list of macroeconomic and microeconomic stylized facts. Here, we discuss a series of experiments on the role of policies affecting i) innovation, ii) industry dynamics, iii) demand and iv) income distribution. Our results suggest the presence of strong complementarities between Schumpeterian (technological)
    Keywords: Keynes; Schumpeter; Evolutionary models
    Date: 2017–01
  6. By: Reda Cherif; Fuad Hasanov; Lichen Wang
    Abstract: We shed new light on the determinants of growth by tackling the blunt and weak instrument problems in the empirical growth literature. As an instrument for each endogenous variable, we propose average values of the same variable in neighboring countries. This method has the advantage of producing variable-specific and time-varying—namely, “sharp”—and strong instruments. We find that export sophistication is the only robust determinant of growth among standard growth determinants such as human capital, trade, financial development, and institutions. Our results suggest that other growth determinants may be important to the extent they help improve export sophistication.
    Date: 2018–05–21
  7. By: Bhanumurthy, N R (National Institute of Public Finance and Policy); Kumawat, Lokendra (Ramjas College, Delhi University)
    Abstract: The paper examines the relationship between financial globalization and growth. While the existing literature suggests divergent conclusions and mostly in the case of developed countries, there is dearth of such studies in the case of developing countries, and South Asia is not an exception. Here, an attempt has been made to study the relationship between financial globalization and growth in seven South Asian countries namely Bhutan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka. Following the framework suggested by Bekaert et al. (2005) and with the help of Panel VAR and Panel causality (in GMM framework) models, the study concludes that the causation from financial globalization to growth in the region appears to be weak. Rather there appears a reverse causation running from growth to financial globalization. This suggests that it is the domestic macroeconomic policies (fiscal prudence, strong domestic financial sector and better growth policies) that act as pull factors for foreign capital. At the individual country level, the results are found to be divergent. The study finds that output growth appears to cause financial globalization in countries such as India, Pakistan, Maldives, and Nepal. However, in countries such as Sri Lanka and Bhutan, it clearly suggests that foreign capital has a significant positive impact on output growth. In Bangladesh, the impact seems to be through indirect channel, where foreign capital seems to have disciplining impact on domestic financial markets, which in turn causes output growth. Similar indirect channel is found in the case of Sri Lanka and this is in addition to the direct channel of financial globalization causing growth.
    Keywords: Financial Globalisation ; Economic Growth ; Capital Flows ; South Asia ; Panel VAR
    JEL: C33 F21 F36
    Date: 2018–06

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