nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2023‒03‒27
24 papers chosen by
Georg Man

  1. Financial Development and Minimum Capital Requirements in Macroeconomic Analysis By Miho Sunaga
  2. Do technological innovation and financial development affect inequality? Evidence from BRICS countries By Mduduzi Biyase; Talent Zwane; Precious Mncayi; Mokgadi Maleka
  3. Income inequality and household debt: Examining the impact of relative income on formal and informal debt in South Africa By Shakeba Foster
  4. The Symmetric and Asymmetric Effect of Remittances on Financial Development: Evidence from South Africa By Mduduzi Biyase; Yourishaa Naidoo
  5. FOREIGN AID AND ECONOMIC GROWTH IN SUB-SAHARAN AFRICAN COUNTRIES By Santos Bila; Mduduzi Biyase; Matias Farahane; Thomas Udimal
  6. Schumpeterian Growth, Price Rigidities, and the Business Cycles By Adil Mahroug; Alain Paquet
  7. The Information in the Yield Spread for the Recession in the Case of Pakistan By Hafsa Hina; Henna Ahsan; Hania Afzal
  8. Nowcasting GDP using tone-adjusted time varying news topics: Evidence from the financial press By Dorinth van Dijk; Jasper de Winter
  9. The Application of Multiple-Output Quantile Regression on the US Financial Cycle By Michal Franta
  10. Catching Up by ‘Deglobalizing’: Capital Account Policy and Economic Growth By Paul Bergin; Woo Jin Choi; Ju H. Pyun
  11. Have drivers of portfolio capital flows changed since the Global Financial Crisis? By Boonman, Tjeerd
  12. The Global Dollar Cycle By Maurice Obstfeld; Haonan Zhou
  13. Effects of Sustainable Monetary and Fiscal Policy on FDI Inflows to EMDE Countries By Bruno Pires Tiberto; Helder Ferreira de Mendonça
  14. Loose Monetary Policy and Financial Instability By Maximilian Grimm; Òscar Jordà; Moritz Schularick; Alan M. Taylor
  15. Monetary Policy, Digital Assets, and DeFi Activity By Antzelos Kyriazis; Iason Ofeidis; Georgios Palaiokrassas; Leandros Tassiulas
  16. Does Money Growth Predict Inflation? Evidence from Vector Autoregressions Using Four Centuries of Data By Edvinsson, Rodney; Karlsson, Sune; Österholm, Pär
  17. Stability and Bifurcations in Banks and Small Enterprises—A Three-Dimensional Continuous-Time Dynamical System By Desogus, Marco; Venturi, Beatrice
  18. The externalities of fire sales: evidence from collateralized loan obligations By Kundu, Shohini
  19. The Politics of Bank Failures in Russia By Zuzana FungáÄ ová; Alexei Karas; Laura Solanko; Laurent Weill
  20. Foreign Banks and Firms' Export Dynamics: Evidence from China's Banking Reform By Ana P. Fernandes; Jing-Lin Duanmu
  21. Quantifying Systemic Risk in the Presence of Unlisted Banks: Application to the European Banking Sector By Daniel Dimitrov; Sweder van Wijnbergen
  22. The Evolution of Financial Market Infrastructure: From Digitalization to Tokenization By Guo, Dong; Zhou, Peng
  23. Inclusion and Democratization Through Web3 and DeFi? Initial Evidence from the Ethereum Ecosystem By Lin William Cong; Ke Tang; Yanxin Wang; Xi Zhao
  24. The Drain Gain: An investigation into how colonial drain helped keep British economy buoyant By Kabeer Bora

  1. By: Miho Sunaga
    Abstract: We develop a macroeconomic model with a moral hazard problem between financial intermediaries and households, which causes inefficient resource allocation, to make us reconsider the financial regulation according to financial development, and individual and aggregate economic activities in the short and long runs. First, we show that in an economy where financial market has not developed, raising minimum capital requirements improves resource allocation and welfare in the long run, while it reduces welfare in an economy where financial market has developed. Second, our study reveals that an economy with a minimum capital adequacy ratio of 8% has a larger drop in aggregate net worth, consumption, and output when a negative capital quality shock occurs. However, during the financial crisis, the economy recovers faster than an economy with a higher minimum capital ratio (about 10%).These results indicate that tighter bank requirements temporally mitigate crises in economies with a developed financial market; however, they do not promote their activity in the long run.
    Date: 2023–02
  2. By: Mduduzi Biyase (College of Business and Economics, School of Economics, University of Johannesburg); Talent Zwane (College of Business and Economics, School of Economics, University of Johannesburg); Precious Mncayi (North West University); Mokgadi Maleka (College of Business and Economics, School of Economics, University of Johannesburg)
    Abstract: While technological innovation and financial development are broadly credited as important drivers of economic growth of developed nations, its impact on inequality (especially in emerging economies) remains understudied. This study employs panel Dynamic Ordinary Least Squares (PDOLS) and panel Fully Modified Ordinary Least Squares (PFMOLS) with annual data sourced from the Standardized World Income Inequality Database, IMF and World Bank (1990-2017) to investigate the impact of technological innovation and financial development on income inequality in BRICS countries. The results suggest that technological innovation increases income inequality in the BRICS nations, while financial development has income reducing effect on inequality. Our results are robust, using alternative estimation with various sub-indicators of financial development (such as financial markets, financial institution), including other measures proxied by access to credit provided by commercial bank.
    Keywords: BRICS, PFMOLS, PDOLS, technological innovation, inequality.
    Date: 2023
  3. By: Shakeba Foster
    Abstract: How does income inequality impact the propensity for and levels of formal and informal household debt? This paper assesses this question using the two most recent waves of the South African Living Conditions Survey. A range of linear models as well as a zero-inflated Poisson model are employed, and inequality is measured by a household relative deprivation index, comparing households within provinces.
    Keywords: Income inequality, Household income, Debt
    Date: 2023
  4. By: Mduduzi Biyase (College of Business and Economics, School of Economics, University of Johannesburg); Yourishaa Naidoo (College of Business and Economics, School of Economics, University of Johannesburg)
    Abstract: Investigating the remittance-financial development relationship is an ongoing endeavor among economists and policy makers. Building and improving on the existing work, this study considers the possibility that the relation between remittances and financial development is potentially asymmetric. This study applies the linear ARDL and captures the possibility of an asymmetrical relationship by applying the non-linear Autoregressive Model (NARDL). Using NARDL, an attempt is made to estimate the short-run and long-run asymmetric responses of financial development through positive and negative partial sum decompositions of changes in remittances. To assess the robustness of the ARDL and NARDL estimates, a battery of long-run robustness tests were employed, including the linear and nonlinear versions of the fully modified ordinary least squares (FMOLS). Annual data series from 1980 to 2017, derived from the World Development Indicators, Fred Economic data and Penn World Tables were used for this study. The ARDL results reveal a positive and significant impact of remittances on financial development, whereas NARDL estimations suggest a both positive and negative shock of remittances on financial development in the long run: a percentage (%) increase in the remittances brings about 0.121568 percent increase in financial development, whereas a one-percent decrease in remittances produces a 0.33363 percent decrease in financial development.
    Keywords: remittances; financial development; domestic credit
    Date: 2023
  5. By: Santos Bila (College of Business and Economics, School of Economics, University of Johannesburg); Mduduzi Biyase (College of Business and Economics, School of Economics, University of Johannesburg); Matias Farahane (School of Economics, Eduadro Mondlhane University); Thomas Udimal (Southwest forestry University)
    Abstract: This study investigates the effect of Official Development Assistance (ODA) on economic growth in Sub-Saharan African (SSA) countries using a panel of 24 countries over 38 years, extracted from the World Development Indicators, African Development Bank and the Penn World Tables 9.0. (2006). We employ the moment moment quantile regression approach to establish whether the effect of ODA varies along the conditional economic growth distribution. Quantile estimates show that ODA is positively related to economic growth in the Sub-Saharan Africa (SSA) region. Moreover, our study finds that the positive impact of aid is bigger in the countries with high levels of economic growth-- the results show a positive statistically significant effect at 75th and 95% quantiles for 5% and 10%, respectively. Controlling for social infrastructures and institutions quality, the results also show a positive and statistically significant relationship between this control variable and economic growth in 50th quantile, 75th quantile and 95th quantile, suggesting that improvement in institutions quality brings much benefit to the countries within those quantiles compared to those in the lower quantiles. Incorporating institutions quality institutions variable and interaction terms into the model influences the effect of aid on economic growth. With those variables ODA is only effective in countries located within the 25th and 50th quantiles, implying that aid has significant effect on economic growth net of institutions quality and other control variables. The implication of our findings is that aid can be strategically employed as a central instrument for stimulating economic growth in SSA countries, particularly low-income countries.
    Keywords: Official Development Assistance, MM-QR, GDP
    Date: 2023
  6. By: Adil Mahroug (University of Quebec in Montreal); Alain Paquet (University of Quebec in Montreal)
    Abstract: Embedding Schumpeterian innovation within a New Keynesian DSGE model matters for the likelihood of innovating when making endogenous decisions about investments in R&D and the path of the technological frontier. This feature brings new challenges at the modeling and simulation stages with implications for the interactions between Schumpeterian innovation and price rigidities, and between business cycle and growth. The interplay of innovation with optimal price setting in the intermediate sector spells out how the technological frontier advances, and how more innovation leads to more price flexibility despite the existence of nominal rigidities. With a reasonable calibration, key moments and comovements of macroeconomic variables are consistent with their observed counterparts. The Schumpeterian features of the model play a role on the cyclical impacts of various standard shocks and that of a knowledge-spillover shock. Moreover, different combinations of steady-state innovation probability and extent of knowledge spillovers, for the same steady-state growth rate of the economy, have important welfare implications in consumption equivalent terms.
    Keywords: Schumpeterian endogenous growth, Innovation, Business cycles, New Keynesian dynamic stochastic general equilibrium (DSGE) model, nominal price rigidity and flexibility.
    JEL: E32 E52 O31 O33 O42
    Date: 2021–11
  7. By: Hafsa Hina (Pakistan Institute of Development Economics); Henna Ahsan (Pakistan Institute of Development Economics); Hania Afzal (Pakistan Institute of Development Economics)
    Abstract: Yield spread is positively linked with future economic expansion to a certain extent, and it has been observed that an inverted yield curve is an indication of recession. The primary purpose of this study is to investigate the effect of yield spread (calculated as the difference between the weighted average rates of return on 5-year deposits and the 3-month rates of return) on the economic activity of Pakistan while incorporating other macroeconomic factors as well.
    Keywords: ARDL, Pakistan, Recession, Yield Spread
    JEL: B23 E3 E4
    Date: 2022
  8. By: Dorinth van Dijk; Jasper de Winter
    Abstract: We extract tone-adjusted, time-varying and hierarchically ordered topics from a large corpus of Dutch financial news and investigate whether these topics are useful for monitoring the business cycle and nowcasting GDP growth in the Netherlands. The financial newspaper articles span the period January 1985 up until January 2021. Our newspaper sentiment indicator has a high concordance with the business cycle. Further, we find newspaper sentiment increases the accuracy of our nowcast for GDP growth using a dynamic fac- tor model, especially in periods of crisis. We conclude that our tone-adjusted newspaper topics contain valuable information not embodied in monthly indicators from statistical offices.
    Keywords: Factor models, topic modeling, nowcasting
    JEL: C8 C38 C55 E3
    Date: 2023–03
  9. By: Michal Franta
    Abstract: The paper demonstrates the benefits of multiple-output quantile regression for macroeconomic analysis. The domestic financial cycle, which is characterized by the co-movement of credit and property prices, is a natural subject of such methodology. More precisely, I examine the tails of the joint distribution of US house price growth and household credit growth since the late 1970s to shed some light on the evolution of systemic risk and its links to various economic and financial factors. The analysis finds that the crucial indicators include the banking sector's exposure to household credit, household leverage, house price misalignment and financial market volatility. This contrasts with the negligible role of real-economy factors. In addition, it is shown that the multiple-output quantile regression framework is a useful tool for forecasting and tracking systemic risk over time. The sustainable growth of house prices and credit can be distinguished from their growth accompanied by the rise in systemic risk to guide policymakers on an appropriate response.
    Keywords: Domestic financial cycle, multiple-output quantile regression, systemic risk
    JEL: C32 E44 G10
    Date: 2023–03
  10. By: Paul Bergin; Woo Jin Choi; Ju H. Pyun
    Abstract: While substantial empirical research has evaluated the question of whether capital account openness promotes economic growth, this paper finds empirical evidence for cases where the opposite is true—that a policy of capital controls can promote economic growth, when combined with a policy of reserve accumulation. Using panel data from 45 countries from 1985–2019, we find that capital controls combined with reserve accumulation—strategic capital account policy—contribute to growth in real GDP and TFP. This effect is stronger for emerging markets and prior to the global financial crisis. We show that the policy is strongly associated with enlarging the scale of the manufacturing sector and productivity, and is consistent with theories of learning-by-doing through exporting.
    JEL: E58 F21 F31 F41
    Date: 2023–02
  11. By: Boonman, Tjeerd
    Abstract: The Global Financial Crisis had a substantial impact on the size and composition of portfolio capital flows, which raises the question whether the factors driving these capital flows have changed. The literature is scarce and shows mixed results, which may be attributable to the time windows used to compare the periods before and especially after the crisis. I identify and compare robust drivers of portfolio capital inflows for 75 countries in two non-overlapping periods (1996–2007 and 2011–19) using the Bayesian Model Averaging method. I find that the drivers have changed since the crisis. Bond investors in advanced and emerging economies have become more prudent, while investors in emerging market equity search for return. After the crisis, the more advanced economies continue to capture more portfolio inflows, which confirms the Lucas paradox, and is driven by institutions rather than capital openness.
    Keywords: Portfolio Capital Flows, Bayesian Model Averaging
    JEL: C11 F32 G15
    Date: 2023–01–30
  12. By: Maurice Obstfeld; Haonan Zhou
    Abstract: The U.S. dollar’s nominal effective exchange rate closely tracks global financial conditions, which themselves show a cyclical pattern. Over that cycle, world asset prices, leverage, and capital flows move in concert with global growth, especially influencing the fortunes of emerging and developing economies (EMDEs). This paper documents that dollar appreciation shocks predict economic downturns in EMDEs and highlights policies countries could implement to dampen the effects of dollar fluctuations. Dollar appreciation shocks themselves are highly correlated not just with tighter U.S. monetary policies, but also with measures of U.S. domestic and international dollar funding stress that themselves reflect global investors’ risk appetite. After the initial market panic and upward dollar spike at the start of the COVID-19 pandemic, the dollar fell as global financial conditions eased; but the higher inflation that followed has induced central banks everywhere to tighten monetary policies more recently. The dollar has strengthened considerably since mid-2021 and a contractionary phase of the global financial cycle is now under way. Owing to increases in public- and business-sector debts during the pandemic, a strong dollar, higher interest rates, and slower economic growth will be challenging for EMDEs.
    JEL: E58 F31 F41 F44 O11
    Date: 2023–03
  13. By: Bruno Pires Tiberto; Helder Ferreira de Mendonça
    Abstract: Emerging Market and Developing Economies (EMDE) countries are the leading destinations of Foreign Direct Investment (FDI). We investigate whether sustainable monetary and fiscal policy through indicators that reflect the expectations concerning the central bank’s commitment to a target and the sustainability of government finance affects FDI inflows. Based on a large sample of 75 EMDE countries from 1990 to 2019, we provide empirical evidence through panel data analysis that sustainable macroeconomic policies are an essential driver of FDI inflows. The findings show EMDE countries should increase the central bank credibility, decrease the fiscal imbalance, and adopt inflation targeting to enhance FDI inflows.
    Date: 2023–02
  14. By: Maximilian Grimm; Òscar Jordà; Moritz Schularick; Alan M. Taylor
    Abstract: Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long-run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and asset price overheating are important intermediating channels.
    JEL: E43 E44 E52 E58 G01 G21 N10
    Date: 2023–02
  15. By: Antzelos Kyriazis; Iason Ofeidis; Georgios Palaiokrassas; Leandros Tassiulas
    Abstract: This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect BTC and ETH, the two largest digital assets, but do not significantly affect the rest of the market. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.
    Date: 2023–02
  16. By: Edvinsson, Rodney (Stockholm University); Karlsson, Sune (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper, we add new evidence to a long-debated macroeconomic question, namely whether money growth has predictive power for inflation or, put differently, whether money growth Granger causes inflation. We use a historical dataset – consisting of annual Swedish data on money growth and inflation ranging from 1620 to 2021 – and employ state-of-the-art Bayesian estimation methods. Specifically, we employ VAR models with drifting parameters and stochastic volatility which are used to conduct analysis both within- and out-of-sample. Our results indicate that the within-sample analysis – based on marginal likelihoods – provides strong evidence in favour of money growth Granger causing inflation. This strong evidence is, however, not reflected in our out-of-sample analysis, as it does not translate into a corresponding improvement in forecast accuracy.
    Keywords: Time-varying parameters; Stochastic volatility; Out-of-sample forecasts
    JEL: E31 E37 E47 E51 N13
    Date: 2023–02–28
  17. By: Desogus, Marco; Venturi, Beatrice
    Abstract: Here, we discuss a three-dimensional continuous-time Lotka–Volterra dynamical system, which describes the role of government in interactions with banks and small enterprises. In Italy, during the COVID-19 emergency, the main objective of government economic intervention was to maintain the proper operation of the bank–enterprise system. We also review the effectiveness of measures introduced in response to the COVID-19 pandemic lockdowns to avoid a further credit crunch. By applying bifurcation theory to the system, we were able to produce evidence of the existence of Hopf and zero-Hopf bifurcating periodic solutions from a saddle focus in a special region of the parameter space, and we performed a numerical analysis.
    Keywords: Credit crunch; simulation; credit big data; nonlinear analysis; periodic solutions; stability; dynamical system; zero-Hopf bifurcation
    JEL: C62 C63 E32 E51 G21 G28
    Date: 2023–03–03
  18. By: Kundu, Shohini
    Abstract: This paper investigates how covenants, intrinsic to Collateralized Loan Obligation (CLO) indentures, may amplify idiosyncratic shocks, imposing negative externalities on unrelated firms in CLO portfo-lios. Following a negative shock to the oil & gas industry, CLOs with exposure to oil and gas loans are pushed closer to their covenant thresholds and fire-sell unrelated loans in the secondary loan market to alleviate these constraints. These fire sales exert price pressure on the securities of unrelated firms, creating market dislocations. The erosion in the liquidity positions of exposed firms spills over into real economic activity. The findings highlight the real effects from fire sales arising due to contracting frictions. JEL Classification: E44, G23, E32
    Keywords: CLOs, closed-end funds, contracting frictions, covenants, externalities, fire sales
    Date: 2023–03
  19. By: Zuzana FungáÄ ová; Alexei Karas; Laura Solanko; Laurent Weill
    Abstract: We study whether bank failure probability systematically varies over the election cycle in Russia. Using monthly data for 2002-2020 and controlling for standard bank risk indicators we find that bank failure is less likely during periods preceding presidential elections. We explore whether this effect is more pronounced for banks whose failure is associated with greater political costs, such as important players in the household deposit market or important players in regional markets. We find no evidence for this latter effect. Overall, our results provide mixed evidence that political cycles matter for the occurrence of bank failures in Russia.
    Keywords: Bank Failure, Election, Russia
    Date: 2022
  20. By: Ana P. Fernandes (Department of Economics, University of Exeter); Jing-Lin Duanmu (Department of Economics, University of Exeter)
    Abstract: This paper investigates how banking integration affects export dynamics. To estimate the causal link, we exploit the phased liberalization of the Chinese banking industry to foreign competition across cities, based on WTO accession commitments, and use transaction-level data for all Chinese exporters. Following deregulation of foreign banks' local-currency lending, the increased local presence of foreign banks from the importing country raises export entry and initial sales to the same country for firms in the city, but has no effect on survival or growth. The effects are significantly more pronounced for firms in industries with less collateralizable assets and those exporting riskier goods. The results uncover particular channels for banking integration to facilitate exports, and are consistent with foreign banks having an informational advantage in screening export projects, relying less on collateral for their lending decisions, and in reducing export risk for firms exporting to the banks' country.
    Keywords: banking deregulation, exports, export dynamics, export risk, financial constraints, financial globalization, foreign banks, knowledge spillover, local-currency lending, uncertainty
    JEL: F10 F14 F36 G20 G28 G32
    Date: 2023–03–14
  21. By: Daniel Dimitrov; Sweder van Wijnbergen
    Abstract: We propose a credit portfolio approach for evaluating systemic risk and attributing it across institutions. We construct a model that can be estimated from high-frequency CDS data. This captures risks from publicly traded banks, privately held institutions, and cooperative banks, extending approaches that rely on information from the public equity market only. We account for correlated losses between the institutions, overcoming a modeling weakness in earlier studies. We also offer a modeling extension to account for fat tails and skewness of asset returns. The model is applied to a universe of banks where we find discrepancies between the capital adequacy of the largest contributors to systemic risk relative to less systemically important banks on a European scale.
    Keywords: systemic risk; CDS rates; implied market measures; financial institutions; fat tails; O-SII buffers
    JEL: G01 G20 G18 G38
    Date: 2023–03
  22. By: Guo, Dong; Zhou, Peng (Cardiff Business School)
    Abstract: This paper examines the historical development and cross­sectional heterogeneities of Financial Market Infrastructure (FMI). From an evolutionary perspective, we review and compare FMIs in the US, Europe, and China. We identify an emerging trend in which the development of FMI is transitioning from digitalization to tokenization with the rise of Distributed Ledger Technology (DLT). Digitalization reinforces centralization, while tokenization promotes decentralization, posing complex challenges to regulatory framework which is also part of FMI. We then specifically analyze DLT­based FMI in the bond market, evaluate different models of tokenization, and propose a heterogeneous consortium blockchain solution.
    Keywords: digitalization; tokenization; blockchain; bond
    Date: 2023–03
  23. By: Lin William Cong; Ke Tang; Yanxin Wang; Xi Zhao
    Abstract: Web3 and DeFi are widely advocated as innovations for greater financial inclusion and democratization. We assemble the most comprehensive dataset to date on the largest Web3 ecosystem and use large-scale computing to conduct an initial investigation. We describe Ethereum’s network structure, time trends, and distributions of transactions, mining, and ownership. Mining income and Ether ownership are concentrated in exchanges and a few individual nodes. Network activities evolve from peer-to-peer to user-DApps/DeFi interactions, with significantly more transactions by large players. Moreover, high percentage transaction fees, congestion-induced fluctuation of gas prices, suboptimal reserve setting, and large return volatility of tokens present particular challenges for small, poor, unsophisticated, and new nodes, not to mention that the high failure rates hurt all users. Finally, we present suggestive causal evidence that base-fee burning mechanisms (e.g., EIP-1559) and airdrop programs (e.g., OmiseGo Airdrop) facilitate inclusion through token monetary redistribution.
    JEL: D63 E50 G29 H23 L14
    Date: 2023–02
  24. By: Kabeer Bora
    Abstract: The global hegemony of Britain in the 19th century is hardly a disputed fact. As a global hegemon, it oversaw the transfer of surplus from the underdeveloped world to its shores. The transfer of surplus was important in maintaining its status as a hegemon. In this essay, I underline the need for Britain to colonize India, its biggest possession. India’s colonial history has been the subject of a lot of scholarly attention but rarely has the focus shifted from the drain of surplus as a cause of underdevelopment of India to a transfer of surplus from India to Britain as a cause of development of Britain. I shed light on this aspect of global surplus extraction and show empirically that this transfer of surplus was invaluable for the success of the British economy. Marx’s macroeconomics and his well-known law of the falling rate of profit are my main sources of support. Accounting for spurious correlation using Hamilton(1994), I find that an increase in colonial drain by 1% increases the rate of profit of Britain by around 9 percentage points. My findings are corroborated by the several robustness checks I perform, including using different measures of domestic exploitation and a different method in Autoregressive Distributed Lag (ARDL). About the whole of the 19th century up until the First World War is included in my period of analysis.
    Keywords: Colonial Drain, Rate of Profit, Time Series Analysis, India JEL Classification: N75, B14, N14
    Date: 2023

This nep-fdg issue is ©2023 by Georg Man. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.