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on Financial Development and Growth |
| By: | Campos, Nauro F; Karanasos, Menelaos; Tan, Bin |
| Abstract: | This paper investigates the effects of financial development and political instability on economic growth in a power-ARCH framework with data for Argentina from 1896 to 2000. Our findings suggest that (i) informal or unanticipated political instability (e.g., guerrilla warfare) has a direct negative impact on growth; (ii) formal or anticipated instability (e.g., cabinet changes) has an indirect (through volatility) impact on growth; (iii) the effect of financial development is positive and, surprisingly, not via volatility; (iv) the informal instability effects are much larger in the short- than in the long-run; and (v) the impact of financial development on economic growth is negative in the short- but positive in the long-run. |
| Keywords: | economic growth; financial development; political instability; power-ARCH; volatility |
| JEL: | C14 D72 E23 O40 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7004&r=fdg |
| By: | Claessens, Stijn; Kose, Ayhan; Terrones, Marco E. |
| Abstract: | We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period. Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of recessions. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions. |
| Keywords: | business cycles; busts; credit crunches; equity prices; house prices; recessions |
| JEL: | E32 E44 E51 F42 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7085&r=fdg |
| By: | Heer, Burkhard; Irmen, Andreas |
| Abstract: | We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. We incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations. We calibrate the model for the US economy. First, we establish that the net effect of a decline in population growth on the growth rate of per-capita magnitudes is positive and quantitatively significant. Second, we find that the pension system matters both for the growth performance and for individual welfare. Third, we show that the assessment of pension reform proposals may be different in an endogenous growth framework as opposed to the standard framework with exogenous growth. |
| Keywords: | capital accumulation; demographic transition; growth; pension reform |
| JEL: | C68 D31 D91 O11 O41 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7172&r=fdg |
| By: | Kose, Ayhan; Prasad, Eswar; Rogoff, Kenneth; Wei, Shang-Jin |
| Abstract: | We review the large literature on various economic policies that could help developing economies effectively manage the process of financial globalization. Our central findings indicate that policies promoting financial sector development, institutional quality and trade openness appear to help developing countries derive the benefits of globalization. Similarly, sound macroeconomic policies are an important prerequisite for ensuring that financial integration is beneficial. However, our analysis also suggests that the relationship between financial integration and economic policies is a complex one and that there are unavoidable tensions inherent in evaluating the risks and benefits associated with financial globalization. In light of these tensions, structural and macroeconomic policies often need to be tailored to take into account country specific circumstances to improve the risk-benefit tradeoffs of financial integration. Ultimately, it is essential to see financial integration not just as an isolated policy goal but as part of a broader package of reforms and supportive macroeconomic policies. |
| Keywords: | capital account liberalization; financial globalization |
| JEL: | F2 F3 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7117&r=fdg |
| By: | Song, Zheng Michael; Storesletten, Kjetil; Zilibotti, Fabrizio |
| Abstract: | This paper constructs a growth model that is consistent with salient features of the Chinese growth experience since 1992: high output growth, sustained returns on capital investments, extensive reallocation within the manufacturing sector, falling labor share and accumulation of a large foreign surplus. The theory makes only minimal deviations from a neoclassical growth model. Its building blocks are financial imperfections and reallocation among firms with heterogeneous productivity. Some firms use more productive technologies than others, but low-productivity firms survive because of better access to credit markets. Due to the financial imperfections, high-productivity firms - which are run by entrepreneurs - must be financed out of internal savings. If these savings are sufficiently large, the high-productivity sector outgrows the low-productivity sector, and attracts an increasing employment share. During the transition, low wage growth sustains the return to capital. The downsizing of the financially integrated sector forces a growing share of domestic savings to be invested in foreign assets, generating a foreign surplus. We test some auxiliary implications of the theory and find robust empirical support. |
| Keywords: | China; Economic Growth; Entrepreneurs; Foreign Surplus; Investment; Productivity Heterogeneity; Rate of Return on Capital; Reallocation; State-Owned Firms. |
| JEL: | G18 O11 O16 O47 O53 P31 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7149&r=fdg |
| By: | Gylfason, Thorvaldur |
| Abstract: | This paper describes some of the ways in which mineral rents and their management influence economic growth and other determinants of growth as well as some of the reasons why many mineral-rich countries have not managed very well to divert their resource rents to furthering economic and social development – that is, why natural capital tends to crowd out human, social, financial and real capital. The empirical evidence of these linkages is presented in two rounds. First, we allow World Bank data covering 164 countries in 1960-2000 to speak for themselves through a sequence of bilateral correlations that suggest an inverse relationship between natural resource dependence and growth via human capital. We then repeat the exercise for two aspects of social capital, corruption and democracy, suggesting an additional adverse effect of natural resource dependence via social capital on growth. In the second round, we test for the robustness of natural resource dependence as a determinant of long-run growth by estimating a series of growth regressions for the same 164 countries. |
| Keywords: | Economic growth; natural resources; social policy |
| JEL: | O11 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7031&r=fdg |
| By: | Mahmood Messkoub |
| Abstract: | This paper provides an assessment of economic growth, employment and poverty reduction in the Arab MENA region. Considering the high rate of unemployment (especially the youth unemployment) and poverty in most countries in the region employment and poverty impacts of growth are of particular concern to policy makers. In the short run for employment growth to be faster than output growth the employment elasticity of growth has to be greater than unity. This is an important condition that is rarely satisfied across all sectors and countries in the region, for good analytical and empirical reasons. For example growth in high productivity sectors will not boost total employment nor reduce poverty substantially in the short run, yet growth in high productivity sectors is essential for accumulation and long term growth. Moreover, if the poor were to benefit from an employment policy they should have been integrated in the sectors where jobs are created – the so called integrability condition of the ‘employment-poverty nexus. Public work projects have been one of the main short term instruments of job creation for the poor in the region, but there the long term impact on poverty has varied and depended crucially on their sustainability, their contribution to improving local infrastructure and economies. These mixed results in no way invalidate the importance of economic growth for unemployment and poverty reduction, but brings into focus the importance of going beyond short term policies for job creation and poverty reduction as well as complementing such policies with social policies both for poverty alleviation and improving skill levels of the work force. |
| Keywords: | economic growth, employment, unemployment, poverty, poverty alleviation, Middle East, North Africa |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:iss:wpaper:460&r=fdg |
| By: | Reinhart, Carmen; Rogoff, Kenneth |
| Abstract: | The historical frequency of banking crises is quite similar in high- and middle-to-low-income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark’s financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States. Banking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging four to six years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike. |
| Keywords: | bail out; banking; crisis; debt; equity prices; house prices |
| JEL: | E6 F3 N10 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7131&r=fdg |
| By: | David Wildasin (Martin School of Public Policy and Administration and Department of Economics, University of Kentucky) |
| Abstract: | A review of recent fiscal history can help to understand the mechanisms by which subnational governments adapt their tax, expenditure, and debt policies to an ever-changing economic environment, and on the role of fiscal assistance from higher-level governments in this process. In principle, proposed Federal assistance to states and localities may provide useful macroeconomic stimulus and financial support, but past experience, in the US and elsewhere, highlights the pitfalls in achieving rapid delivery of substantial assistance while simultaneously targeting scarce fiscal resources to the most urgent needs and preserving incentives for prudent financial management by states and localities. |
| JEL: | H7 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ifr:wpaper:2009-07&r=fdg |