nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒09‒03
eleven papers chosen by
Georg Man

  1. Financial Deepening in a Two-Sector Endogenous Growth Model with Productivity Heterogeneity By Nguyen, Quoc Hung
  2. The Landscape of Economic Growth: Do Middle-Income Countries Differ? By Eichengreen, Barry; Park, Donghyun; Shin, Kwanho
  3. Financial constraints and economic development: the role of innovative investment By Galina Vereshchagina
  4. The Broken Link: Bank Credit and Non-hydrocarbon Output Growth in Oil-Dependent Economies. By Anthony Anyanwu; Christopher Gan; Baiding Hu
  5. Drivers of Growth in Fast Emerging Economies: a Dynamic Instrumental Quantile Approach to Real Output and its Rates of Growth in BRICS and MINT countries, 2001-2011 By Asongu, Simplice; Odhiambo, Nicholas
  6. Credit Conditions, Dynamic Distortions, and Capital Accumulation in Mexican Manufacturing By Felipe Meza; Carlos Urrutia; Sangeeta Pratap
  7. Banking and Financial Access Reforms, Labor Markets, and Financial Shocks By Alan Finkelstein Shapiro; Brendan Epstein
  8. Bubbly Recessions By Toan Phan; Andrew Hanson; Siddhartha Biswas
  9. Fragile New Economy: The Rise of Intangible Capital and Financial Instability By Ye Li
  10. Effects of financial crises on productivity, capital and employment By Oulton, Nicholas; Sebastiá-Barriel, María
  11. The dynamic relationship between Financial Development and the Energy Demand in North Cyprus: Evidence from ARDL Bounds and Combine Cointegration Tests By Tursoy, Turgut

  1. By: Nguyen, Quoc Hung
    Abstract: We develop a tractable two-sector endogenous growth model in which heterogeneous entrepreneurs face borrowing constraints and the government collects tax to fund public eduction. This model is isomorphic to a Uzawa-Lucas model and there exists a balanced-growth path equilibrium in which the growth rate depends on the financial deepening level. We show that the policy tax rate exerts inverted U-shaped effects on the growth rate. Additionally, at the optimal policy tax rates the model's predictions are consistent with correlational regularities documented from 35 OECD countries with regards to financial deepening, factor accumulation and working hours.
    Keywords: Heterogeneity; Financial Deepening; Endogenous Growth
    JEL: E10 E22 E44 O16
    Date: 2018–04–02
  2. By: Eichengreen, Barry (University of California Berkeley); Park, Donghyun (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: We review the growth experience of middle-income countries. Economic factors associated with growth appear to differ between middle income and other countries. The efficiency of the financial system is importantly related to the growth rate in low- and middle-income countries, but appears to matter less as one moves up the income scale. Demographic variables also matter importantly in low-income countries. In middle-income countries, in contrast, measures of the financial system no longer appear to matter as importantly, as if inefficiencies in banking and financial systems are no longer as binding a constraint as at earlier stages of financial development; nor are demographic variables as important as before. At this point, other variables gain a growing role: these include whether the country experiences a banking or currency crisis, the extent of nonforeign direct investment capital inflows, and government debt as a share of gross domestic product.
    Keywords: crisis; growth; middle income; total factor productivity
    JEL: O10 O40 O47
    Date: 2017–08–09
  3. By: Galina Vereshchagina (Arizona State University)
    Abstract: This paper argues that accounting for firms' endogenous productivity growth plays an important role in understanding the link between financial and economic development. First, using a simple analytically tractable model, it shows that incorporating endogenous investment in firm productivity into the model amplifies the negative impact of borrowing constraints on output. This occurs even if the models with and without such productivity investments are calibrated to match the same value of profit to output ratio in the absence of borrowing constraints. Second, the paper embeds productivity investment into an otherwise standard variation of the Bewley-Aiyagary-Hugget model used in the existing literature to evaluate the impact of borrowing constraints on economic development. Preliminary numerical results suggest that the borrowing constraints have a considerably larger impact in the model with endogenous innovative investment, compared to the model in which the firm productivity grows exogenously (and is calibrated to match the same moments in the unconstrained benchmark). For example, under a conservative calibration in which the ratio of intangible investment to output is 5.5%, the GDP and measured TFP fall by 37% and 12.5%, respectively. In contrast, in an observationally equivalent model, in which the firm productivity follows an exogenous random process, the GDP and measured TFP fall by only 28% and 4.6%, respectively.
    Date: 2018
  4. By: Anthony Anyanwu; Christopher Gan; Baiding Hu
    Abstract: Economies dominated by hydrocarbons possess certain characteristics not shared by other economies because their economic dynamics are mainly determined by the prices of oil and gas at world markets. Over the last decade, oil-dependent countries have been promoting diversification towards the non-oil sector. In particular, significant priority has been given to the financial sector. To this end, this paper explores the impact of bank credit in the growth of oil-rich economies and tests if it differs in the emerging non-oil sectors. The study utilizes both the panel contegration and pooled mean group estimators for 28 oil-dependent countries over the period 1990-2012. The findings suggest that bank credit significantly increases GDP per capita but has no impact on non-oil GDP per capita. The economic potential of non-natural resource sectors is great and the resources remain largely untapped.
    Keywords: Agribusiness, Agricultural Finance, Environmental Economics and Policy, Resource /Energy Economics and Policy
    Date: 2016–08–25
  5. By: Asongu, Simplice; Odhiambo, Nicholas
    Abstract: We analyze the evolution of fast emerging economies of the BRICS (Brazil, Russia, India, China & South Africa) and MINT (Mexico, Indonesia, Nigeria & Turkey) countries, by assessing growth determinants throughout the conditional distributions of the growth rate and real GDP output for the period 2001-2011. An instrumenal variable (IV) quantile regression approach is complemented with Two-Stage-Least Squares and IV Least Absolute Deviations. We find that the highest rates of growth of real GDP per head, among the nine countries of this study, corresponded to China, India, Nigeria, Indonesia and Turkey, but the highest increases in real GDP per capita corresponded, in descending order, to Turkey China, Brazil, South Africa and India. This study analyzes the impacts of several indicators on the increase of the rate of growth of real GDP and on the logarithm of the real GDP. We analyze several limitations of the methodology, related with the selection of the explained and the explanatory variables, the effect of missing variables, and the particular problems of some indicators. Our results show that Net Foreign Direct Investment, Natural Resources, and Political Stability have a positive and significant impact on the rate of growth of real GDP or on real GDP.
    Keywords: Economic Growth; Emerging countries; Quantile regression
    JEL: C52 F21 F23 O40 O50
    Date: 2018–01
  6. By: Felipe Meza (Instituto Tecnológico Autónomo de Méx); Carlos Urrutia (ITAM); Sangeeta Pratap (Hunter College and CUNY Graduate Center)
    Abstract: The objective of this paper is to document a transmission channel from credit conditions to capital accumulation at a disaggregated level. We use a simple multi-sector model of production and investment to identify investment wedges (i.e., deviations from the optimality condition implied by a stochastic Euler equation). Using a panel of observations at the 4-digit level from the Mexican manufacturing industry, we measure the corresponding dynamic distortions in capital accumulation. Our counterfactual experiments show that the behavior of capital distortions is important to account for changes in the aggregate capital stock over time. We then analyze the sources of these distortions, working with one important candidate: bank credit. We show in a simple model of investment with financial frictions that more availability and cheaper access to credit reduce capital distortions. We find some statistical support for this mechanism in the data.
    Date: 2018
  7. By: Alan Finkelstein Shapiro (Tufts University); Brendan Epstein (University of Massachusetts, Lowell)
    Abstract: The degree of bank competition and firms' and households' participation in the domestic banking system differs considerably in developing and emerging economies (EMEs) relative to advanced economies (AEs). We build a small-open-economy model with endogenous firm entry, monopolistic banks, household and firm heterogeneity in participation in the banking system, and labor search to analyze the labor market and business cycle consequences of financial participation and banking reforms in EMEs. Our key finding is that there is a pre-reform threshold level of firm participation in the banking system below which reform implementation leads to sharper unemployment and aggregate fluctuations. Thus, for initially low (high) levels of firm and household financial participation, joint financial inclusion and bank competition reforms have adverse (beneficial) volatility effects. Our findings suggest that banking reform can reduce labor market and aggregate volatility by fostering household financial participation and bank competition in tandem, but only after a certain threshold of firm participation in the banking system is achieved.
    Date: 2018
  8. By: Toan Phan (Federal Reserve Bank of Richmond); Andrew Hanson (University of North Carolina Chapel Hill); Siddhartha Biswas (University of North Carolina, Chapel Hill)
    Abstract: We analyze the welfare tradeoff of rational bubbles in a tractable growth model with financial frictions and downward nominal wage rigidity. The monetary authority follows an inflation targeting Taylor-type interest rate rule that is constrained by the zero lower bound. We show that competitive speculation in a risky bubbly asset can result in an excessive investment boom that precedes an inefficient bust, and a larger boom precedes a deeper bust. In particular, the collapse of a large bubble can push the economy into a “secular stagnation” equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent recession with inefficiently low employment, investment and output. The inefficiency is due to the pecuniary externality of speculative investment that arises from combination of financial frictions and nominal rigidities. The model provides a framework to evaluate macroprudential leaning-against-the-bubble policies to balance the welfare tradeoff between the boom and bust phases of bubbly episodes.
    Date: 2018
  9. By: Ye Li (The Ohio State University)
    Abstract: This paper studies financial instability in an economy where growth is driven by intangible investment. Firms' intangible investment creates new productive capital. Once created, capital can be sold to financial intermediaries. Since intangible investment is not pledgeable, firms carry cash, which is inside money issued by intermediaries (short-term safe debt). In good times, well capitalized intermediaries push up the price of capital. This motivates firms to create more capital, but to do so, they must build up cash holdings. As firms' money demand expands, the yield on inside money (i.e., intermediaries' debt cost) declines, so intermediaries increase leverage and push up capital price even further. This inside money channel generates several features shared with the U.S. economy before the Great Recession: rising corporate cash holdings, financial intermediaries growing through leverage, increasing asset prices, and declining interest rate. The model also generates endogenous risk accumulation: a longer period of boom and expansion of the financial sector predict a more severe crisis. In crises, the spiral flips, leading to sudden deleveraging of intermediaries, asset price collapse, and investment contraction.
    Date: 2018
  10. By: Oulton, Nicholas; Sebastiá-Barriel, María
    Abstract: We examine the hypothesis that capacity can be permanently damaged by financial, particularly banking, crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labor productivity and a long-run effect on its level is estimated on 61 countries over 1954–2010. A banking crisis as defined by Reinhart and Rogoff reduces the long-run level of GDP per worker, and also that of capital per worker, by on average 1.1 percent, for each year that the crisis lasts; it also reduces the TFP level by 0.8%. The long run, negative effect on the level of GDP per capita, 1.8 percent, is substantially larger. So there is also a hit to employment. The effects on labor productivity, capital and TFP are larger in developing than in developed countries; the opposite is the case for employment.
    Keywords: banking crisis; financial; potential output; productivity; recession
    JEL: E23 E32 J24
    Date: 2017–02–01
  11. By: Tursoy, Turgut
    Abstract: This paper investigates the dynamic relationship between financial development, energy demands, economic growth and total trade with the ARDL Bounds and Combined cointegration approaches in North Cyprus for the period of 1977Q1 – 2016Q4. The empirical results provide evidences for the long-run and short-run relationship between the concern variables. All the techniques such as cointegration and innovation accounting method supporting the relationship between variables. Positive innovation in GDP is connected with increase in financial development and energy demands. Energy demands response positively for the shocks from GDP and Financial development, and financial development responses just only GDP and itself.
    Keywords: Financial development, GDP, Energy, Trade
    JEL: E44 O43 Q43
    Date: 2018–08–02

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