nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒07‒09
seven papers chosen by
Georg Man

  1. Bank profitability and economic growth By Klein, Paul-Olivier; Weill, Laurent
  2. Capital Requirements, Risk-Taking and Welfare in a Growing Economy By Pierre-Richard Agénor; Luiz A. Pereira da Silva
  3. Government Financial Institutions and Capital Allocation Efficiency in Japan By Masami Imai
  4. Financial Markets and the Allocation of Capital: The Role of Productivity By Filippo Di Mauro; Fadi Hassan; Gianmarco I. P. Ottaviano
  5. FDI as a contributing factor to economic growth in Burkina Faso: How true is this? By Zandile, Zezethu; Phiri, Andrew
  6. A heterogeneous-agent model of growth and inequality for the UK By Meenagh, David; Minford, Patrick; Yang, Xiaoliang
  7. The Money View Versus the Credit View By Baker, Sarah S.; López-Salido, J David; Nelson, Edward

  1. By: Klein, Paul-Olivier; Weill, Laurent
    Abstract: This paper analyses the effect of bank profitability on economic growth. While policymakers have shown major concerns for low levels of bank profitability, there are no empirical studies on the growth effects of bank profitability. To fill this gap, we investigate the impact of bank profitability on economic growth using a sample of 133 countries during the period 1999–2013 with several empirical approaches. Our first major conclusion is that a high current level of bank profitability contributes positively to economic growth. Our second conclusion is that the past level of bank profitability exerts a negative influence on economic growth leading to the absence of significance for the overall bank profitability. Hence, the positive impact of bank profitability on economic growth is short-lived. These findings are robust to a battery of robustness checks, including those using alternative measures for profitability and growth.
    JEL: G21 O16 O40
    Date: 2018–07–02
  2. By: Pierre-Richard Agénor; Luiz A. Pereira da Silva
    Abstract: The effects of capital requirements on risk-taking and welfare are studied in a stochastic overlapping generations model of endogenous growth with banking, limited liability, and government guarantees. Capital producers face a choice between a safe technology and a risky (but socially inefficient) technology, and bank risk-taking is endogenous. Setting the capital adequacy ratio above a structural threshold can eliminate the equilibrium with risky loans (and thus inefficient risk-taking), but numerical simulations show that this may entail a welfare loss. In addition, the optimal ratio may be too high in practice and may concomitantly require a broadening of the perimeter of regulation and a strengthening of financial supervision to prevent disintermediation and distortions in financial markets.
    Keywords: Capital Requirements, Bank risk-taking, Investment, Financial Stability, Economic Growth, Capital Goods, Financial Regulation, Financial Intermediaries, Financial Markets, risky investments, financial stability, financial regulation
    JEL: O41 G28 E44
    Date: 2017–03
  3. By: Masami Imai (Department of Economics, Wesleyan University)
    Abstract: This paper examines the impact of government loans on capital allocation efficiency with Japan’s prefecture-level data from 1975-2005. We address the endogeneity of government loans by using the exogenous variation in the share of government loans that is correlated with the intensity of political support for the Liberal Democratic Party (LDP), the dominant political party. We find that the share of government loans is strongly and negatively correlated with the quality of capital allocation, as measured by the elasticity of industry investment to valueadded, Wurgler’s η, and that this negative correlation is more pronounced in declining industries than growing industries. Moreover, the results show that the share of government loans is negatively correlated with total factor productivity growth but positively correlated with investment-to-output ratio. Taken as a whole, Japan’s government financial institutions might have propped up declining industries in the LDP strongholds with overall negative effects on capital allocation efficiency and technical progress.
    Date: 2018–06
  4. By: Filippo Di Mauro; Fadi Hassan; Gianmarco I. P. Ottaviano
    Abstract: The efficient allocation of credit is a key element for the success of an economy. Traditional measures of allocative efficiency focus on the Q-theory of investment and, in particular, on the elasticity of finance to investment opportunities proxied by firm real value added. This paper introduces a theory-based alternative measure that focuses instead on the elasticity of credit to firm productivity. In doing so, it develops a simple theoretical framework that delivers clear predictions for the elasticity of credit to current and future productivity depending on capital market frictions. When applied to the novel firm-level dataset of the Competitiveness Research Network (CompNet) set up by the EU System of Central Banks, the proposed measure leads to normative statements about the efficiency of credit allocation across the largest Eurozone economies, changing the conclusions that one would reach based on traditional empirical applications of Q-theory.
    Keywords: bank credit, capital allocation, productivity, credit constraints
    JEL: G10 G21 G31 D92 F3 O16
    Date: 2018–07
  5. By: Zandile, Zezethu; Phiri, Andrew
    Abstract: Much emphasis has been placed on attracting FDI into Burkina Faso as a catalyst for improved economic growth within the economy. Against the lack of empirical evidence evaluating this claim, we use data collected from 1970 to 2017 to investigate the FDI-growth nexus for the country using the ARDL bounds cointegration analysis. Our empirical model is derived from endogenous growth theoretical framework in which FDI may have direct or spillover effects on economic growth via improved human capital development as well technological developments reflected in urbanization and improved export growth. Our findings fail to establish any direct or indirect effects of FDI on economic growth except for FDI’s positive interaction with export-oriented growth, albeit being constrained to the short-run. Therefore, in summing up our recommendations, political reforms and the building of stronger economic ties with the international community in order to raise investor confidence, which has been historically problematic, should be at the top of the agenda for policymakers in Burkina Faso.
    Keywords: Foreign direct investment; economic growth; Burkina Faso; West Africa; ARDL cointegration.
    JEL: C13 C32 C51 F21 O40
    Date: 2018–06–11
  6. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Yang, Xiaoliang (Cardiff Business School)
    Abstract: This paper analyses the effect of wealth inequality on UK economic growth in recent decades with a heterogeneous-agent growth model where agents can enhance individual productivity growth by undertaking entrepreneurship. The model assumes wealthy people are more able to afford the costs of entrepreneurship. Wealth concentration therefore stimulates entrepreneurship among the rich and so aggregate growth, whose fruits in turn are largely captured by the rich. This process creates a mechanism by which inequality and growth are correlated. The model is estimated and tested by indirect inference and is not rejected. Policy-makers face a trade-off between redistribution and growth.
    Keywords: Heterogeneous-agent Model, Entrepreneurship, Aggregate Growth, Wealth Inequality, Redistribution, Indirect Inference
    JEL: E10 C63 O30 O40
    Date: 2018–06
  7. By: Baker, Sarah S.; López-Salido, J David; Nelson, Edward
    Abstract: We argue that Schularick and Taylor's (2012) comparison of credit growth and monetary growth as financial-crisis predictors does not necessarily provide a valid basis for achieving one of their stated intentions: evaluating the relative merits of the "money view" and "credit view" as accounts of macroeconomic outcomes. Our own analysis of the postwar evidence suggests that money outperforms credit in predicting economic downturns in the 14 countries in Schularick and Taylor's dataset. This contrasts with Schularick and Taylor's (2012) highly negative verdict on the money view. In accounting for the difference in findings, we first explain that Schularick and Taylor's characterization of the money view is defective, both because their criterion for its validity (that rapid monetary growth predicts financial crises) is misplaced, and because they incorrectly take the money view's proponents as relying on the notion that monetary aggregates are a good proxy for credit aggregates. In fact, the money view of Friedman and Schwartz does not predict an automatic relationship between rapid monetary growth and (financial or economic) downturns, nor does it rest on money being a good proxy for credit. We further show that Schularick and Taylor's data on money have systematic faults. For our reexamination of the evidence, we have constructed new, and more reliable, annual data on money for the countries studied by Schularick and Taylor.
    Keywords: credit view; Financial crises; money view; Recessions
    JEL: E32 E51
    Date: 2018–06

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