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on Financial Development and Growth |
| By: | Chow, Sheung Chi; Vieito, João Paulo; Wong, Wing-Keung |
| Abstract: | To overcome the limitations of the traditional approach which uses linear causality to examine whether the supply-leading and demand-following theories hold. As certain countries will be found not to follow the theory by using the traditional approach, this paper first suggests using all the proxies of financial development and economic growth as well as both multivariate and bivariate linear and nonlinear causality tests to analyze the relationship between financial development and economic growth. The multivariate nonlinear test not only takes into consideration both dependent and joint effects among variables, but is also able to detect a multivariate nonlinear deterministic process that cannot be detected by using any linear causality test. We find five more countries in which the supply-leading hypothesis and/or demand-following hypothesis hold true than with the traditional approach. However, there is still one country, Pakistan, for which no linear or nonlinear causality is found between its financial development and economic growth. To overcome this limitation, this paper suggests including cointegration in the analysis. This leads us to conclude that either supply-leading or demand-following hypotheses or both hold for all countries without any exception. There will be some types of relationships between economic growth and financial development in any country such that either they move together or economic growth causes financial development or financial development causes economic growth without any exception. The finding in our paper is may be useful for governments, politicians, and other international institutions in their decision making process for the development of the countries and reducing poverty. |
| Keywords: | Financial development, economic growth, cointegration, linear causality, nonlinear causality, developing countries, supply-leading hypothesis, demand-following theory. |
| JEL: | C12 F20 O40 |
| Date: | 2018–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:87641&r=fdg |
| By: | Mtiraoui, Abderraouf; GABSI, Feriel |
| Abstract: | The aim of this work is to study, in the first place, the theoretical framework the relationship between Islamic finance, conventional finance and economic growth while supporting an interesting literature review dealing with this type of research area especially the use of the new financial and economic terms. Second, we reviewed the review of existing literature that highlights the nature of the relationship between financial development and economic growth while considering the role played by Islamic finance as a catalyst for economic growth in investments and public spending and makes human work more efficient (education). Finally, we empirically try to discover the impacts of Islamic finance and conventional finance on economic growth and therefore the relationship between classical financial development (M3 /GDP) and Islamic financial development (FI) on the economic growth. Our empirical validation is very diverse considering the nature of the estimation methods used namely the fixed effects method, the random effects method, the GMM method in first differences and the GMM method in system for our study area MENA for twenty successive years (1990-2009). |
| Keywords: | Islamic Finance, Conventional Finance, Economic Growth and Dynamic Panel Model |
| JEL: | G17 |
| Date: | 2018–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:88251&r=fdg |
| By: | Jeremy Greenwood; Pengfei Han; Juan M. Sanchez |
| Abstract: | The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, venture capitalists provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., statistics by funding round concerning the success rates, failure rates, investment rates, equity shares, and IPO values. Raising capital gains taxation reduces growth and welfare. |
| JEL: | E13 E22 G24 L26 O16 O31 O40 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24808&r=fdg |
| By: | Hans Gersbach (ETH Zurich, IZA Institute of Labor Economics, CESifo (Center for Economic Studies and Ifo Institute), and Centre for Economic Policy Research (CEPR)); Jean-Charles Rochet (University of Zurich, University of Toulouse I, and Swiss Finance Institute); Martin Scheffel (University of Cologne) |
| Abstract: | This paper integrates banks into a two-sector neoclassical growth model to account for the fact that a fraction of firms relies on banks to finance their investments. There are four major contributions to the literature. First, although banks’ leverage amplifies shocks, the endogenous response of leverage to shocks is an automatic stabilizer that improves the resilience of the economy. In particular, financial and labor market institutions are essential factors that determine the strength of this automatic stabilization. Second, there is a mix of publicly financed bank re-capitalization, dividend payout restrictions, and consumption taxes that stimulates a Pareto-improving rapid build-up of bank equity and accelerates economic recovery after a slump in the banking sector. Third, the model replicates typical patterns of financing over the business cycle: procyclical bank leverage, procyclical bank lending, and countercyclical bond financing. Fourth, the framework preserves its analytical tractability wherefore it can serve as a macro-banking module that can be easily integrated into more complex economic environments. |
| Keywords: | Financial Intermediation, Capital Accumulation, Banking Crisis, Macroeconomic Shocks, Business Cycles, Bust-Boom Cycles, Managing Recoveries |
| JEL: | E21 E32 F44 G21 G28 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1738&r=fdg |
| By: | Eric Hilt |
| Abstract: | This paper studies the role of bank affiliations in mitigating frictions related to asymmetric information. The analysis focuses on Massachusetts, and tests whether firms with bank directors on their boards fared better following the Panic of 1873, which did not directly impact the state’s commercial banks, but produced a prolonged economic slump. Around 59 percent of all non-financial corporations in the state had a bank director on their board in 1872. These firms survived the recession of the 1870s at higher rates, grew faster and experienced less of a deterioration in their credit ratings. Consistent with banker-directors helping to resolve problems related to asymmetric information, these effects were strongest among young firms. Counterfactual estimates suggest that in the absence of bank affiliations, the total assets of the non-financial corporations in Massachusetts that existed in 1872 would have been 35 percent lower in the wake of the recession. These results suggest an important role for the banking sector in New England’s industrialization, namely that affiliations with commercial banks helped nonfinancial corporations maintain access to external finance during economic downturns. |
| JEL: | N11 N21 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24792&r=fdg |
| By: | Atsin, Jessica A.L.; Ocran, Matthew K. |
| Abstract: | This study sought to investigate the relationship between financial liberalization and stock market development in four Sub-Saharan African stock markets using quarterly data for the period 1975 - 2014. The analysis focused on three dimensions of liberalization in isolation, which are capital account liberalization, stock market liberalization and financial sector liberalization. Hence, the empirical analysis uses three Bayesian VAR models for each market studied. The results from the investigation show a positive correlation between stock market development and the liberalization of stock markets and the financial sector in all four countries, which advocates for the opening of financial markets to international investors, as well as the deepening of the sector. Additionally, a positive long-run response of stock market development to all three forms of liberalization in all the markets considered suggested that greater focus should therefore be put on increasing financial openness by removing the restrictions in the financial sectors of the respective economies, as this will promote the effectiveness of the deliverance of credit to the private sector, efficient credit evaluation and public sector surveillance, which is provided through the stock market. Finally, the analysis uncovered negative correlation between stock market development and inflation in all four markets, suggesting that policy makers in these countries should pay special attention to inflation targeting policies in order to positively contribute to enhancing these markets. |
| Keywords: | Financial liberalization, capital account liberalization, stock market liberalization, stock market development, Bayesian Vector Autoregressive model. |
| JEL: | G18 G28 G38 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:87580&r=fdg |
| By: | Haffejee, muhammad Ismail; Masih, Mansur |
| Abstract: | Income inequality in South Africa has been increasing from a Gini-coefficient height of 0.57 in 2000 to 0.65 in 2014. It is therefore important to investigate whether, in a developing economy, financial sector development reduces or worsens income inequality by mobilising and allocating savings into productive investments. For this purpose, South Africa, with arguably the second-largest economy in Africa, has been identified. The Non-linear Auto Regressive Distributed Lag (NARDL) technique advanced by Shin et. al. (2014) has been applied. This paper contributes to existing literature both in terms of being country-specific as well as demonstrating for the first time, to the best of our knowledge, that there is no long-run asymmetry between financial development and income inequality. Our conclusions support the pressing need for double-digit economic growth in South Africa together with moderate increase in government consumption expenditures. |
| Keywords: | Financial development, Income Inequality, South Africa, NARDL |
| JEL: | C22 C58 G23 |
| Date: | 2018–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:87574&r=fdg |
| By: | Emanuel Kopp |
| Abstract: | U.S. business investment has taken a serious toll during the global financial crisis and also in the recovery phase investment did not pick up as expected. What is surprising is that the alleged investment slowdown happened at a time of record corporate profits and retained earnings, highly supportive financial conditions, improved sentiment, rising equity valuations, and strong labor markets—factors established in supporting business investment. Applying accelerator models and Bayesian Model Averaging, this paper discusses the extent to which U.S. business investment has been unusual. Results suggest that cautious expectations of future aggregate demand growth explain most of the weakness in investment, and that the oil and gas sector accounts for a considerable portion of the investment slump. Consequently, the behavior of U.S. business investment in recent years has not been unusual once these factors are taken into account. Also, there is very little evidence for uncertainty holding back investment, or that firms’ financial measures "crowded out" capital expenditure. |
| Date: | 2018–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:18/139&r=fdg |