nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2019‒09‒02
ten papers chosen by
Georg Man

  1. Financial development and economic growth in the era of financial liberalization By Kenny, Victoria S
  2. Financial development and economic growth in Uganda: A multivariate causal linkage By Odhiambo, Nicholas M; Nyasha, Sheilla
  3. Does bank-based financial development spur economic growth? Empirical evidence from the Democratic Republic of Congo (DRC) By Odhiambo, Nicholas M; Nyasha, Sheilla
  4. Is liberalizing finance the game in town for Nigeria ? By Sulaiman, Saidu; Masih, Mansur
  5. Synergizing Ventures By Akcigit, Ufuk; Dinlersoz, Emin; Greenwood, Jeremy; Penciakova, Veronika
  6. Measuring the Impact of FDI and Private Domestic Investment on Growth-Case of South Asia By Maham Bokhari; Syed Akhtar Hussain Shah
  7. Does Domestic Investment Contribute to Economic Growth in Uruguay? What did the Empirical Facts Say? By Bakari, Sayef; Tiba, Sofien; Fakraoui, Nissar
  8. The Effects of Access to Credit on Productivity: Separating Technological Changes from Changes in Technical Efficiency By Nusrat Abedin Jimi; Plamen Nikolov; Mohammad Abdul Malek; Subal Kumbhakar
  9. The Poverty-Reducing Effects of Financial Inclusion: Evidence from Cambodia By Seng, Kimty
  10. The Financial Development of London in the 17th Century Revisited: A View from the Accounts of the Corporation of London By Sussman, Nathan

  1. By: Kenny, Victoria S
    Abstract: Financial Institutions play crucial intermediary roles in achieving a nation’s economic growth which is achieved by the way financial intermediaries consolidate funds and channel them between the surplus and deficit sectors of an economy (Nwaeze Chinweoke 2014). The strengthening of these financial institutions goes a long way in ensuring macroeconomic stability and sustainable economic growth. Financial development ensures that financial institutions improves information communication in terms of possible investment opportunities and capital allocation, firm monitoring, exertion of corporate governance, savings pool mobilization as a means of payment.
    Keywords: Financial institutions, intermediaries, capital allocation, economic growth
    Date: 2019–08
  2. By: Odhiambo, Nicholas M; Nyasha, Sheilla
    Abstract: In this study, we have explored the dynamic causal relationship between financial development and economic growth in Uganda during the period from 1980 to 2015. Although the finance-growth nexus debate had been raging for decades, Uganda, just as many other low-income sub-Saharan African countries, has not yet received adequate coverage on the subject. To eliminate the variable-omission-bias associated with some previous studies, two intermittent variables namely, savings and inflation, have been included alongside financial development and economic growth in a multivariate Granger-causality setting. In addition, five proxies of financial sector development have been used in the current study, namely money supply, deposit money bank assets as a percentage of bank assets, liquid liabilities to GDP, private credit by deposit money banks to GD, and bank deposits to GDP. Using the ARDL approach, the findings of the study reveal that the direction of causality between financial development and economic growth in Uganda is not clear-cut. It varies from one model to the other, depending on the proxy used for financial development. When financial development is proxied by liquid liabilities to GDP and bank deposits to GDP, a unidirectional causality from financial development to economic growth is found to prevail. When deposit money bank assets to bank assets ratio is considered a proxy of financial development, a bi-directional causality between financial development and economic growth is found to predominate. Finally, when money supply and private credit by deposit money banks to GDP proxies are used, no causality is found to exist between financial development and economic growth in either direction. Based on these results, it is recommended that when drafting policies aimed at boosting economic growth, policymakers should target growth-led financial development proxies as policy implementation outcome may vary depending on the targeted financial development proxy.
    Keywords: Financial Development; Economic Growth; Uganda; Granger-Causality
    Date: 2019–08
  3. By: Odhiambo, Nicholas M; Nyasha, Sheilla
    Abstract: In this study, we examined the dynamic causality between financial development and economicgrowth in the Democratic Republic of the Congo (DRC), using time-series data from 1965 to2015. Unlike some previous studies, the current study used three proxies to examine thislinkage. These are liquid liabilities as a percentage of GDP (FD1), deposit money bank assetsas a percentage of GDP (FD2), and bank deposits as a percentage of GDP (FD3). In addition,the study used savings and inflation as intermittent variables, thereby creating a multivariateGranger-causality model, and limiting the omission-of-variable bias, which has been found insome previous studies. Using the ARDL bounds testing approach, the study found that there isa short-run causal relationship between financial development and economic growth in theDRC, but the direction of causality is dependent on the proxy used to measure the level offinancial development. When financial development was proxied by liquid liabilities as apercentage of GDP, unidirectional Granger-causality was found to prevail in the short run,running from economic growth to financial development. However, when deposit money bankassets as a percentage of GDP and bank deposits as a percentage of GDP were used as proxies,causality between financial development and economic growth was found to be bidirectional,but only in the short run. The study recommends that policy efforts in the DRC should bedirected at developing both the financial sector and the real sector in the short run as bothsectors have been found to be mutually beneficial to each other in the main, in this study.
    Keywords: Financial Development; Economic Growth; Granger-Causality Test; Democratic Republic of Congo; DRC
    Date: 2019–08
  4. By: Sulaiman, Saidu; Masih, Mansur
    Abstract: Stemming from the McKinnon-Shaw’s advocacy for financial liberalization in “less-developed countries” and its attendant unresolved intellectual gymnastics, the authors primarily attempt to model the relationship between; financial liberalisation and economic growth on the one hand and financial liberalisation and investment on the other. With an array of rich variable mix, necessary variable interaction terms, and improvement on some past researches whilst inculcating the Autoregressive Distributed Lag (ARDL) methodology, the study establishes the long-run and short-run relationship between financial liberalisation, investment and growth in a time series framework. Secondarily, Granger causality is also employed to determine the direction of causality between financial development and economic growth. The results obtained suggest that there is a positive long-run equilibrium relationship between financial liberalisation; investment and growth. The study also finds a causal relationship between financial development and economic growth in Nigeria. This might mean that the financial liberalisation process in Nigeria has stimulated financial development leading to significant contribution to economic growth. The results might lay credence to the view that financial development plays a crucial role in the process of economic development, as such, reducing government inefficiencies might be a choice policy in freeing resources for the development of financial institutions.
    Keywords: financial liberalization, growth, investment, Nigeria, ARDL
    JEL: C58 E43 E52
    Date: 2017–12–29
  5. By: Akcigit, Ufuk; Dinlersoz, Emin; Greenwood, Jeremy; Penciakova, Veronika
    Abstract: Venture capital (VC) and growth are examined both empirically and theoretically. Empirically, VC-backed startups have higher early growth rates and initial patent quality than non-VC-backed ones. VC-backing increases a startup's likelihood of reaching the right tails of the firm size and innovation distributions. Furthermore, outcomes are better for startups matched with more experienced venture capitalists. An endogenous growth model, where venture capitalists provide both expertise and financing for business startups, is constructed to match these facts. The presence of venture capital, the degree of assortative matching between startups and financiers, and the taxation of VC-backed startups matter significantly for growth.
    Keywords: Endogenous Growth; mergers and acquisitions; R&D; venture capital
    Date: 2019–08
  6. By: Maham Bokhari (Ministry of Planning, Development, & Reform, Islamabad); Syed Akhtar Hussain Shah (Ministry of Planning, Development, & Reform, Islamabad)
    Abstract: This paper examines the impact of private domestic investment (PDI) on growth in comparison with the Foreign Direct Investment (FDI). It aims to conduct a cross country analysis of South Asia from 1975 to 2017. Trade Openness, Inflation, Government Expenditure, Human Capital, Exchange Rate are control variables of interest for the investment model used in this research. The countries tested are Bangladesh, India, Pakistan and Sri Lanka. Fixed Effects and Random Effects method is employed to test the panel data of the four South Asian countries. The results show that in case of South Asia on the whole, there is a positive and significant impact of PDI on growth. To further analyse the subject and put forward a potential policy for the region, the regression is decomposed into sectoral Private Domestic Investment: Primary, Secondary and Services. PDI affects the growth of South Asia, only when it is invested in the manufacturing or the primary sector.
    Keywords: FDI (Foreign Direct Investment), PDI (Private Domestic Investment), Trade Openness
    Date: 2019
  7. By: Bakari, Sayef; Tiba, Sofien; Fakraoui, Nissar
    Abstract: The fundamental role of domestic investment to provide economic prosperity is very well recognized by the economic theory since the Mercantilist theory. Hence, we investigate the impact of domestic investment on economic growth for the case of the Uruguayan economy over the period 1960-2017. For this aim, we employ the Vector Error Correction Model (VECM). Our highlights reveal the absence of a significant impact of domestic investment on growth in the short- and long-run. Due to the marginal role of domestic investment played in the Uruguayan economy, the weak saving rate couldn’t significantly help the economy and creating wealth. Therefore, a strong saving policy is required to encourage domestic investors and reevaluate their crucial role in the economic process of Uruguay.
    Keywords: Domestic investment, Economic growth, VECM, Uruguay.
    JEL: E2 E22 E23 O4 O40 O47 O54
    Date: 2019–08
  8. By: Nusrat Abedin Jimi; Plamen Nikolov; Mohammad Abdul Malek; Subal Kumbhakar
    Abstract: Improving productivity among microenterprises is important, especially in low-income countries where market imperfections are pervasive, and resources are scarce. Relaxing credit constraints can increase the productivity of microenterprises. Using a field experiment involving agricultural microenterprises in Bangladesh, we estimated the impact of access to credit on the overall productivity of rice farmers and disentangled the total effect into technological change (frontier shift) and technical efficiency changes. We found that relative to the baseline rice output per decimal, access to credit resulted in, on average, approximately a 14 percent increase in yield, holding all other inputs constant. After decomposing the total effect into the frontier shift and efficiency improvement, we found that, on average, around 11 percent of the increase in output came from changes in technology, or frontier shift, while the remaining 3 percent was attributed to improvements in technical efficiency. The efficiency gain was higher for modern hybrid rice varieties, and almost zero for traditional rice varieties. Within the treatment group, the effect was greater among pure tenant and mixed-tenant microenterprise households compared with microenterprises that only cultivated their own land.
    Keywords: field experiment, microfinance, credit, Efficiency, productivity, farmers, South Asia
    JEL: E22 D20 H81 O12 O16 Q12
    Date: 2019–08
  9. By: Seng, Kimty
    Abstract: This article analyses the effects of financial inclusion on poverty in terms of household income per capita in Cambodia, with data from the FinScope Survey carried out in 2015. The analysis describes the effects via financial literacy, accounting for endogenous selection bias resulting from unobserved confounders and for structural differences between users and non-users of financial services in terms of income functions. The findings suggest that the use of financial services is very likely to make a great contribution to reducing household budget deficit and poverty if the users, female in particular, have at least basic financial knowledge.
    Keywords: Poverty, financial inclusion, financial literacy, endogenous, Cambodia
    JEL: O1 O12
    Date: 2019–08–26
  10. By: Sussman, Nathan
    Abstract: We study an overlooked episode of financial development in England during the 17th century. We construct a novel, annual series of interest rates paid by the Corporation of London. We show that: interest rates declined by 350 basis points; Interest rates co-moved with Amsterdam: we attribute half of this decline to the integration of the capital markets of London and Amsterdam and half to the increase in London's financial market liquidity. The reduction of the usury rate lowered interest rates by 50 basis points in the 1650s. England's financial evolution and path towards modern growth date, therefore, to the 17th century.
    Keywords: England; Financial Development; Financial Intermediation; growth; interest rate; Usury
    JEL: G23 N2 N23 O16 O43
    Date: 2019–08

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