financial markets and growth the last five years have witnessed a resurgence of interest in the relationship between financial intermediation and economic growth this issue had been extensively studied nearly two decades earlier by goldsmith 1969 mckinnon 1973 shaw 1973 and others who produced considerable evidence that financial development correlates with growth but their work though insightful lacked analytical foundations in traditional growth theory financial intermediation could be related to the level of the capital stock per worker or to the level of productivity but not to their respective growth rates the latter were ascribed to exogenous technical progress the recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of endogenous growth models which have shown that there can be self sustaining growth without exogenous technical progress and that the growth rate can be related to preferences technology income distribution and institutional arrangements this provides the theoretical underpinning that early contributors lacked tinancial intermediation can be shown to have not only level effects but also growth effects the resulting models have offered important insights into the effect of financial development on growth and vice versa they have also provided new impetus to empirical research on these issues this paper reviews the ground covered so far on the theoretical and empirical front and points to some still unresolved issues

the demand for money in a developing economy the case of kenya abstract the demand for money function occupies a central role in most theories of aggregate economic activity especially in the formulation and execution of effective monetary policy this paper examines the demand for money in the developing economy of kenya special attention is paid to the model specification its dynamic structure and to its temporal stability the empirical results show that for both conventional definitions of money the narrow and the broad the theoretical model fits the kenyan data quite well and the proposed variables are all statistically significant and with the anticipated signs the results further suggest based on a battery of tests that the estimated money demand equations for kenya are temporally stable focus is also given to the open economy nature of the money demand model and the results indicate that some measure of foreign interest rates plays a significant role in the kenyan money demand equations as potentially in any other money demand equation of an open economy monetary policy in kenya therefore must take into account the response of domestic money demand to changes in such external factors

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

finance and the sources of growth at various stages of economic development this article studies the effects of financial development on the sources of growth in different groups of countries recent theoretical work shows that financial development may affect productivity and capital accumulation in different ways in industrial versus developing countries this hypothesis is tested with panel data from 74 countries using gmm dynamic panel techniques results are consistent with the hypothesis finance has a strong positive influence on productivity growth primarily in more developed economies in less developed economies the effect of finance on output growth occurs primarily through capital accumulation jel o4 g1

interpreting an error correction model partial adjustment forward looking behaviour and dynamic international money demand an error correction model is derived from a stochastic dynamic programming problem incorporating rational expectations a parametric restriction is derived that allows a test for the theoretical proposition that the optimal strategy behind the error correction from entails the failure to asymptotically close the gap between the choice variable and the growing target this is accomplished by nesting a partial adjustment model with forward looking expectations within the error correction paradigm the counterintuitive behaviour embodied in the error correction model is not supported by the data in the context of a cross country comparison of cash balances relationships

shocking the eurozone abstract in this paper the monetary transmission mechanism within the european monetary union is investigated the impulse response functions and forecast error variance decompositions of a structural vector error correction model svecm are compared with those of a new keynesian theoretical model the identifying restrictions of the svecm are directly derived from the theoretical model two permanent shocks are identified one having only nominal and one having only real effects the three transitory shocks comprise a short term interest rate shock an aggregate demand shock and a money demand shock the main conclusions are that permanently reducing the inflation objective depresses output in the first year but has no real effects in the long run regarding output variability the results indicate that aggregate demand shocks are most important during the first year after which aggregate supply shocks dominate

random walk and the velocity of money some evidence from annual quarterly series abstract the random walk hypothesis is tested using annual data of the united kingdom and quarterly data of eight industrialized countries while annual series follow a random walk not all quarterly series do this sharply contrasts with the results of ahking 1982

what type of finance matters for growth bayesian model averaging evidence this paper examines the effect of finance on long term economic growth using bayesian model averaging to address model uncertainty in cross country growth regressions the literature largely focuses on financial indicators that assess the financial depth of banks and stock markets these indicators are examined jointly with newly developed indicators that assess the stability and efficiency of financial markets once the finance growth regressions are subjected to model uncertainty the results suggest that commonly used indicators of financial development are not robustly related to long term growth however the findings from the global sample indicate that one newly developed indicator the efficiency of financial intermediaries is robustly related to long term growth

a moral hazard trap to growth this paper studies the consequences of asymmetric information in the investment sector upon economic growth in this paper the information asymmetry generates a moral hazard problem this moral hazard problem restricts financial arrangements it is shown that these restrictions make even the long run competitive equilibrium income dependent upon history this result also holds in case there is perfect capital mobility however when there is capital mobility the government may be able to intervene in a pareto improving way copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

borrowing constraints human capital accumulation and growth abstract borrowing constraints increase aggregate savings and therefore may increase growth this paper argues however that by reducing human capital accumulation borrowing constraints also have negative effects on growth these effects are discussed in an overlapping generations model with endogenous growth empirical evidence for oecd and developing countries lend support to the main predictions of the model

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

stock markets and development this paper asks if financial development especially stock market development affects the level and or the growth rate of economic activity it finds a substantial effect on both current wisdom suggests that the growth effects of financial intermediation could be either permanent or transitory for instance the greenwood jovanovic 1990 henceforth gj model has an ak stucture with no diminishing returns to the reproducible factor and a permanent exogenous improvement in financial structure would cause a permanent increase in the rate of growth on the other hand if the returns to the reproducible factor did diminish better intermediation could lead only to level effects since one should not a priori exclude either growth effects or level effects we shall look for both our search for growth effects will use the gj model our search for level effects will rely on an amended version of the mankiw romer and weil 1992 henceforth mrw structure

a variance ratio test of random walks in foreign exchange rates the separate variance ratio tests under homoscedasticity and heteroscedasticity both provide evidence rejecting the random walk hypothesis using five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 the rejections cast doubt on the random walk hypothesis in exchange rates which has received support in the existing literature furthermore since the rejections are robust to heteroscedasticity they suggest autocorelations of weekly increments in the nominal exchange rate series which may be consistent with the exchange rate overshooting or undershooting phenomenon in the past decade there has been a consensus that nominal exchange rates follow a random walk process since a unit root and uncorrelated increments are both required for a random walk process the random walk is usually supported in the existing literature either because a unit root component is detected in the exchange rate series or because the increment in the exchange rate is found to be serially uncorrelated for example meese and singleton 1982 and baillie and bollerslev 1989 both find a unit root component in the exchange rate series and the evidence provided in giddy and dufey 1975 cornell and dietrich 1978 logue sweeney and willett 1978 and hsieh 1988 all suggest that the exchange rate series contains uncorrelated increments in this paper the random walk hypothesis for the nominal exchange rate series is reexamined by applying a variance ratio test developed in lo and mackinlay 1988 to five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 while there are two implications of the random walk unit root and uncorrelated increments this paper focuses on the uncorrelated increments aspect this is not only because there are some important departures from the random walk that unit root test cannot detect but also because the autocorrelation aspect may yield

finance as a driver of corporate social responsibility finance is grease to the economy therefore we assume that it may affect corporate social responsibility csr and the sustainability of economic development too this paper discusses the transmission mechanisms between finance and sustainability we find that there is no simple one to one relationship between financial development and sustainable development but there are various often indirect linkages it appears that most of the literature concentrates on the role of public shareholders when it comes to changing corporate policy and performance in a more sustainable direction however this focus neglects the potential impact of the credit channel and private equity on a firm s non financial policies and performance these very powerful mechanisms can govern business policies and practices therefore there appears to be much more scope for finance to promote socially and environmentally desirable activities and to discourage detrimental activities than has been acknowledged in the academic literature so far

does economic structure determine financial structure abstract in this paper we examine the relationship between the structure of the real economy and a country s financial system we consider whether the development of the real economic structure can predict the direction of evolution of a country s financial structure using data for 108 countries we find a significant relationship between real economic structure and financial structure next we exploit shocks to the economies in india finland and sweden and south korea and show that changes in the economic structure of a country influence the evolution of its financial system this suggests that financial institutions and capital markets change in response to the structure of industries

the demand for money in eec countries abstract this paper examines the demand for money in the eec countries and is focussed on five issues first it starts form a common economic framework which allows for shifts from m 2 to non money assets and vice versa second special attention is given to the dynamic structure of the statistical model in order to obtain meaningful conclusions on e g the speed of adjustment of actual to optimal money holdings third the study is entirely based on a uniform set of quarterly data for the eight countries concerned fourth the paper presents a careful examination of the residuals and finally analyses the predictive behaviour of the estimated models for all countries we found long run income elasticities greater than unity and interest rate elasticities clustered around 0 20 the impact of inflation and the business cycle variable appeared to be significant in the majority of countries considered

high tech firms and credit rationing abstract informational frictions between borrowers and lenders differ across classes of borrowers innovative firms undertake high risk high return projects which are likely to be little understood by financial intermediaries as a consequence they may end up allocating too large a share of funds to traditional low risk low return projects this proposition finds some support in a cross section of italian manufacturing firms using several proxies to classify firms into high tech and low tech groups and direct information on each firm s access to bank credit high tech firms are found to be more likely to be credit constrained than low tech firms the results suggest that the responsiveness of r d expenditure to cash flow found in the literature is likely due to pervasive credit constraints on innovative firms rather than to cash flow proxying for future expectations the paper also sheds light on the main factors affecting the probability of a firm being rationed in the credit market

financial liberalization in sub saharan africa what do we know abstract beginning from the early 1980s countries in sub saharan africa embarked on financial liberalization policies with a view to reversing the ill effects of financial repression this paper provides a survey of financial liberalization in sub saharan african countries over the period 1980 to 2004 our review of empirical studies showed that financial liberalization has had diverse and contrasting effects on savings investment and economic growth most studies found a significant positive effect of financial liberalization on investment whereas its effect on savings has been largely insignificant the evidence on the effect on economic growth is inconclusive as different studies find contrasting results it is found that financial liberalization policies have not had the desired and expected results as both financial and macroeconomic variables have not improved following financial liberalization in these countries this calls for a rethinking of financial liberalization in sub saharan african countries it is important that financial liberalization is carried out in a stable macroeconomic environment in addition to this there should be a building and reform of institutions and the strengthening of prudential regulation following this financial liberalization can be embarked upon but it must be properly sequenced and not rushed

anticipated policy and endogenous growth in a small open monetary economy abstract this paper analyzes the effects of a preannounced change in the growth rate of credit in a small open economy the model based on an endogenous growth model introduces the adjustment costs for investment and the role of money in the production function and highlights the dynamic behavior of an open economy we show that an increase in the rate of anticipated credit growth lowers the steady growth rate of capital real money balances and real output we also find that the rate of depreciation of the domestic currency will rise steadily toward its stationary level the anticipated domestic credit growth hence exhibits monetary nonsuperneutrality in both the rate and the level of output in the intermediate and the long run

financial determinants of domestic investment in sub saharan africa evidence from panel data abstract this study investigates the effects of financial development on domestic investment in a sample of 30 sub saharan african countries it is based on a dynamic serial correlation investment model including various indicators of financial development controlling for country specific fixed effects and nonfinancial factors of investment the results indicate a positive relationship between domestic investment total investment and private investment and various indicators of financial development higher financial development leads to higher future levels of investment implying a potent long run effect of financial development on domestic investment the findings imply that financial development can stimulate economic growth through capital accumulation

regional growth and finance in europe is there a quality effect of bank efficiency abstract in this study we test whether regional growth in 11 european countries depends on financial development and suggest the use of cost and profit efficiency estimates as quality measures of financial institutions contrary to the usual quantitative proxies of financial development the quality of financial institutions is measured in this study as the relative ability of banks to intermediate funds an improvement in bank efficiency spurs five times more regional growth then an identical increase in credit does more credit provided by efficient banks exerts an independent growth effect in addition to direct quantity and quality channel effects

financial development economic growth and banking sector controls evidence from india this paper uses newly collected data from the reserve bank of india to examine the effects of various types of banking sector controls on the process of financial deepening with the exception of a lending rate ceiling these controls are found to influence financial deepening negatively independently of the well known effect of the real interest rate exogeneity tests suggest that financial deepening and economic growth are jointly determined thus policies which affect financial deepening may also have an influence on economic growth the role of banking sector controls in the process of economic development has received considerable attention in the literature the traditional approach due to mckinnon i973 and shaw i973 postulates that government intervention in the pricing and allocation of loanable funds dubbed financial repression inhibits financial development by depressing real interest rates see

financial contagion and attention allocation this paper explains financial contagion between two stock markets with uncorrelated fundamentals by fluctuations in international investors attention allocation we model the process of attention allocation that underlies portfolio investment in international markets using investors who face information processing constraints investors optimally allocate more attention to a region hit by a financial crisis to the detriment of other markets the resulting endogenous increase in uncertainty causes a reduction in the capacity to bear risks by international investors that induces them to liquidate their positions in all risky assets hence there is a collapse in stock prices around the world we show that the degree of non anticipation of a crisis is crucial for the existence of contagion using data from the east asian crisis and the number of news stories about thailand in the financial times relative to news stories about argentina brazil and chile as a proxy for the relative attention allocated to the asian stock market we find evidence consistent with two key predictions of our model first the higher the volatility of the originator market the more relative attention allocated to this market and second the more relative attention allocated to the originator market the higher the volatility of the other markets our findings support the attention reallocation channel as a transmission mechanism of financial crises between regions during the period from january 1997 to july 1998

same financial development yet different economic growth why we re study the relationship between financial development and real gdp per capita growth in 48 countries what we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable if not negative effect on growth we examine whether or not these impacts are a product of various financial and economic conditional variables our conditional variables consist of financial liberalization two sets of country development dummies crises in banking and currency dummies the creditor protection index as well as the anti director and corruption indices our results clearly show that the conditional variables of financial liberalization high income level and good shareholder protection mitigate the negative impacts of banking development on growth in contrast the conditional variables of middle income level regional latin american sub saharan african and east asian dummies banking and currency crises good creditor protection and higher corruption strengthen the negative impacts of banking development on growth next the conditional variables of middle income level latin american sub saharan african and east asian dummies strengthen the positive impacts of stock market development on growth whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth last we find that the relationship between growth and bank development is better described as a weak inverse ushape this inverse u shape becomes stronger when additional stock market variables are squared thus financial development and growth may in fact be in a nonlinear form

uniqueness and indeterminacy on the dynamics of endogenous growth abstract in this paper we study the dynamics of endogenous growth both in the model of lucas and in a generalization that incorporates a labor leisure choice we characterize the regions of the parameter space that give rise to unique equilibria as well as the regions that yield a continuum of equilibria with positive growth rates we find that such multiple equilibria exist for empirically very plausible parameters in particular when the lucas model is modified to incorporate endogenous labor journal of economic literature numbers e00 e3 o40

the effect of financial liberalization on capital flight in african economies summary in this paper we assess the effects of financial liberalization on capital flight in african economies a portfolio model in which capital flight is one of the assets is estimated on a sample of nine african countries for 1970 91 the estimation results suggest that financial liberalization induces a reduction in capital flight after augmenting the model with submodels for the banking sector the government sector and the external sector we conduct simulation experiments involving an interest rate deregulation a decrease in reserve requirements and a change in exchange rate policy the simulation results show that capital flight is reduced by all the three financial liberalization measures the effects however are very small considering both the estimation and simulation results we conclude that financial liberalization policies are useful in attempts to reduce capital flight in african economies but per se the policies may not be the panacea

monetary targeting in the netherlands an application of cointegration tests there are two criteria to choose an intermediate variable for monetary targeting first the money demand function needs to be stable and second the monetary authorities should be able to control the target variable given the available instruments in this paper we examine whether m1 and m2 in the netherlands fulfil the first requirement i e we investigate whether a stable relationship exists between these monetary variables and key macroeconomic variables co integration techniques are used which are very well suited for this purpose monetary policy in the netherlands has been directed towards the growth rate of broad money m2 the present findings do not suport the choice of m2 as an intermediate target for monetary policy in the netherlands a stable long term relationship between m2 and real nnp and long and short term interest rates does not exist the results for m1 are considerbly better though not favourable at all scores the estimated moeny demand function for m1 is a good indicator for m

stock and credit market expansion and economic development in emerging markets further evidence utilizing cointegration analysis this paper empirically investigates the relationship between equity and credit market development and economic growth in a sample of five very important emerging markets in particular employing a multivariate time series methodology to test for long run trends and causality between variables that proxy for stock market development credit market development and economic development the results seem to suggest that equity markets have a role to play only in relatively liberalized economies like chile and mexico in financially repressed economies like india the equity market does not affect real sector growth furthermore the banking crises in the 1980s and 1990s in chile and mexico resulted in a negative relation between economic growth and the credit market in south korea equity and credit markets both affect economic growth but not vice versa in countries where the nature of the stock market has been speculative like taiwan a negative relationship is detected between equity market develo

pattern formation spatial externalities and regulation in coupled economic ecological systems abstract we study the management of ecosystems in which interacting state variables that are affected by management decisions diffuse in space we study pattern formation first in a setting where economic agents maximize myopic profits and ignore spillovers onto agents at other sites and second in the context of a social planner who internalizes these spillovers we compare patterns under these two institutions and study how the differences in the patterns generated by these two institutions impact the design of regulatory schemes to internalize the externalities at the same time we introduce new methods based on fourier series type decompositions that enable us to turn an intractable infinite dimensional optimal control problem into a countable number of finite dimensional optimal control problems as far as we know these methods are new to the economics literature our theory is applied to the management and regulation of a semi arid system

the chinese box the opaque economic borders of the chinese state although the state in china is no longer all encompassing as it had been during the pre 1979 centrally planned period it still reaches into numerous areas of the economy notably through its continuing ownership of state owned enterprises as a result china poses a paradox in that it has incomplete property rights and rule of law which are thought to be essential for growth there are though numerous inefficiencies associated with such a gradual transition which may have maintained a stable growth rate in the past but could hamper future economic development as a key example state owned firms continue to benefit from financial repression in which they received preferable allocations of credit thus china s high savings rate fuels investment which has driven growth but is increasingly inefficient as credit is funnelled to the less productive soes this inefficiency points to the need for legal and institutional reforms which may conflict with the still broad but opaque borders of the chinese state copyright 2011 oxford university press

modeling monetary trends in italy using historical data the demand for broad money 1861 1990 in this paper we estimate a stable demand for money relationship for italy using a long series of historical data we extend previously available data sets to obtain a sample for the years 1861 to 1990 and use cointegration analysis and two stage estimation procedures to obtain a dynamic model for m2 demand by employing a small number of explanatory variables and a nonlinear error correction model we find a stable demand for money relationship our model incorporates significant inflation and interest rate effects in contrast to previous studies of this type

climate threshold financial hoarding and economic growth we use an iterative finite difference method to establish theoretical models that reflect the relationships among climate threshold financial hoarding and economic growth we build a simultaneous equations model to conduct an empirical analysis based on china s statistical data from 1979 to 2012 our study yields the following results china s climate threshold has shown a zigzag shaped rising trend since 1979 the main reasons for the rapid expansion of financial hoarding were high savings rate savings leakage higher marginal efficiency of financial hoarding compared to capital efficiency or higher internal creativity of the financial sector there were positive cumulative effects between financial hoarding and economic growth which were significantly inhibited by climate threshold the climate threshold had discrepant influences on different industries to achieve a balanced economy more money should be invested in the real sector to appropriately reduce the rate of savings leakage the financial s

modeling financial contagion using mutually exciting jump processes we propose a model to capture the dynamics of asset returns with periods of crises that are characterized by contagion in the model a jump in one region of the world increases the intensity of jumps both in the same region self excitation as well as in other regions cross excitation generating episodes of highly clustered jumps across world markets that mimic the observed features of the data we develop and implement moment based estimation and testing procedures for this model the estimates provide evidence of self excitation both in the us and the other world markets and of asymmetric cross excitation with the us market typically having more influence on the jump intensity of other markets than the reverse we propose filtered values of the jump intensities as a measure of market stress and examine their out of sample forecasting abilities

the islamic interest free banking system some empirical evidence 1988 the islamic interest free banking system some empirical evidence applied economics vol 20 no 3 pp 417 425

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

information contagion and bank herding we show that the likelihood of information contagion induces profit maximizing bank owners to herd with other banks when bank loan returns have a common systematic factor the cost of borrowing for a bank increases when there is adverse news on other banks since such news conveys adverse information about the common factor the increase in a bank s cost of borrowing relative to the situation of good news about other banks is greater when bank loan returns have less commonality in addition to the systematic risk factor hence banks herd and undertake correlated investments so as to minimize the impact of such information contagion on the expected cost of borrowing competitive effects such as superior margins from lending in different industries mitigate herding incentives

imperfectly informed voters and strategic extremism we analyze a two candidate downsian model considering that voters use shortcuts e g interest group media endorsements to infer candidates policy platforms that is voters do not observe candidates exact platforms but only which candidate offers the more leftist rightist platform relative positions in equilibrium candidates behavior tends to maximum extremism but it may converge or diverge depending on how voters behave when indifferent policywise between the candidates when the tie breaking rule used by the voters is sufficiently fair candidates converge to the extreme preferred by the median voter but when it strongly favors a certain candidate each candidate specializes in a different extreme

directed credit financial development and financial structure theory and evidence the recent initiative of the rbi in reviving the policy of directed credit allocation in a period dominated by the neoliberal philosophy necessitates reconsideration of the role of policy directed

a survey of recent developments in the literature of finance and growth this paper provides a survey of the recent progress in the literature of financial development and economic growth the survey highlights that most empirical studies focus on either testing the role of financial development in stimulating economic growth or examining the direction of causality between these two variables although the positive role of finance on growth has become a stylized fact there are some methodological reservations about the results from these empirical studies several key issues unresolved in the literature are highlighted the paper also points to several directions for future research

redistributive politics and economic efficiency the political process often compensates the losers from technical change or international competition in an economically inefficient way namely by subsidizing or protecting declining industries instead of encouraging the movement of resources to other more productive uses we find that a dynamic inconsistency in the game of redistributive politics contributes to this outcome to achieve economically efficient outcomes it is necessary that those making economically inefficient choices not be given offsetting transfers but the political process distributes income on the basis of political characteristics which are in general different from the economic characteristics that are rewarded by the market we identify circumstances in which the inefficient choosers have desirable political characteristics and are therefore immune from threats of having to face the economic consequences of their choices

indeterminacy and increasing returns abstract we investigate properties of the one sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

liquidity risk and financial competition implications for asset prices and monetary policy abstract this paper studies the implications of banking competition for capital markets and monetary policy in particular i develop a two sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential banks insure depositors against such risk and invest in the economy s assets in this setting i compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector unlike previous work banks can have market power in both deposits and capital markets compared to a perfectly competitive financial sector i demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation assets prices and the degree of risk sharing furthermore multiple steady states can emerge and the economy becomes subject to poverty traps more importantly market power in financial markets may overturn the tobin effect present under a perfectly competitive financial sector this necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation

equity markets and growth cross country evidence on timing and outcomes 1980 1995 abstract the rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact yet the need to focus on recent data poses implementation difficulties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries this paper overcomes some of these difficulties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980 1995 after describing recent theories on the role of stock markets in growth and considering a pure cross sectional empirical approach our panel vars show leading roles for stock market liquidity and the intensity of activity in traditional financial intermediaries on per capita output the findings underscore the potential gains associated with developing deep and liquid financial markets in an increasingly global economy

costly intermediation the big push and the big crash abstract why does financial activity generate large real effects we argue that this may reflect a multiplicity of equilibria due to dynamic interactions between worker s saving decisions and bank s monopolistic competition we show that the equilibrium responses of key aggregates to changes in investment uncertainty and intermediation costs depend crucially on intertemporal substitutability and aggregate employment small financial disturbances may cause the economy to shift between low and high employment equilibria thus providing explanation for the big push and the big crash the high employment high real interest rate equilibrium is consistent with the development experience of the financially repressed east asian economies prior to july 1997

are output fluctuations transitory according to the conventional view of the business cycle fluctuations in output represent temporary deviations from trend the purpose of this paper is to question this conventional view if fluctuations in output are dominated by temporary deviations from the natural rate of output then an unexpected change in output today should not substantially change one s forecast of output in say five or ten years our examination of quarterly postwar united states data leads us to be skeptical about this implication the data suggest that an unexpected change in real gnp of 1 percent should change one s forecast by over 1 percent over a long horizon

systemic risk financial contagion and financial fragility abstract although it is hard to arrive at a widely accepted definition for systemic risk it is generally acknowledged that it is the risk of the occurrence of an event that threatens the well functioning of the system of interest financial payments banking etc sometimes to the point of making its operation impossible we model systemic risk with two main components a random shock that weakens one or more financial institutions and a transmission mechanism which transmits and possibly exacerbates such negative effects to the rest of the system our model could be conceptually represented by a network already described in previous works in this work we show how is possible to estimate the distribution of losses for the banking system with our model additionally we show how it is possible to separate the distribution of losses into two components the losses incurred by the initial shock and the losses resulting from the contagion process finally once the distribution is estimated we can derive standard risk measures for the system as a whole another important contribution of this work is that we can follow the evolution of certain risk measures like the expected loss or the cvar in order to evaluate if the system is becoming more or less risky in fact more or less fragile additionally we can decompose the distribution of losses of the whole banking system into the systemic and the contagion elements and we can determine if the system is more prone to experience contagious difficulties during a certain period of time

capital markets financial intermediaries and liquidity supply abstract we study a dynamic economy endowed with a sequence of overlapping generations of consumers and production processes and where productive assets are illiquid and consumption preferences are subject to uninsurable demand for liquidity we characterize the steady states that can be achieved with alternative financial systems we show that infinitely lived financial intermediaries offering a liability with age dependent restrictions may implement a social optimum with full insurance if instead they offer anonymous unrestricted contracts then only second best consumption allocations with partial insurance obtain we also examine the consumption allocations available when agents can trade shares in competitive stock markets while allowing for trade across generations may or may not improve upon generational autarky we show that this competitive equilibrium is not a social optimum and is dominated by a system of infinitely lived unrestricted intermediaries

stability analysis of financial contagion due to overlapping portfolios abstract common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis we develop a network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage and we show how it can be understood in terms of a generalized branching process this can be used to compute the stability for any particular configuration of portfolios by studying a stylized model we estimate the circumstances under which systemic instabilities are likely to occur as a function of parameters such as leverage market crowding diversification and market impact although diversification may be good for individual institutions it can create dangerous systemic effects and as a result financial contagion gets worse with too much diversification there is a critical threshold for leverage below it financial networks are always stable and above it the unstable region grows as leverage increases note that our model assumes passive portfolio management during a crisis however we show that dynamic deleveraging during a crisis can amplify instabilities the financial system exhibits robust yet fragile behavior with regions of the parameter space where contagion is rare but catastrophic whenever it occurs our model and methods of analysis can be calibrated to real data and provide simple yet powerful tools for macroprudential stress testing

random walks and monetary velocity in the g 7 countries new evidence from a multiple variance ratio test the random walk hypothesis rwh of the velocity of money has often been supported for the developed economies the literature is however far from unanimous this paper employs the most recent methodological advances in testing for random walks the multiple variance ratio test to re examine the behaviour of the velocity of money in the g 7 countries monetary velocity is computed as the ratio of nominal income to contemporaneous money stock under alternative definitions of income and money the empirical results from the present study do not support the rwh in most of the g 7 countries with the us m1 and m2 velocities as exceptions furthermore the results show that the rwh is sensitive to either the definitions of monetary velocity or the sample period of study

bank competition and access to finance international evidence using a unique database for 74 countries and for firms of small medium and large size we assess the effect of banking market structure on the access of firms to bank finance we find that bank concentration increases obstacles to obtaining finance but only in countries with low levels of economic and institutional development a larger share of foreign owned banks and an efficient credit registry dampen the effect of concentration on financing obstacles while the effect is exacerbated by more restrictions on banks activities more government interference in the banking sector and a larger share of government owned banks

manufacturing growth and financial development evidence from oecd countries recent theoretical models conjecture that the development of the financial sector is essential for economic growth we investigate this hypothesis from a time series perspective and find that financial sector gdp is cointegrated for many oecd countries not so much with manufacturing gdp but mostly with manufacturing total factor productivity moreover this relation is in some instances characterized by long run causality in the sense of granger and lin however even within this homogeneous group of countries the variety of results suggests a more complex picture than is apparent from cross sectional evidence

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

the random walk hypothesis of the velocity of money some evidence from five eec countries abstract this paper investigates the random walk hypothesis of the velocity of money using quarterly data from five eec countries for all five countries this hypothesis is not rejected by the data

velocity and the variability of money growth evidence from granger causality tests comment in a recent issue of this journal hall and noble 1987 employ the grangercausality method to test milton friedman s 1970 hypothesis that money growth volatility is a causal factor in changes in velocity the background of hall and noble s investigation is based on 1 the controversial marked decline in m 1 velocity in 1982 and 2 the apparent weakening of the money nominal gnp linkage implicit in the velocity decline this latter aspect of the drop in velocity would appear to undermine a basic plank of monetarism and has been described by robert gordon 1983 as the demise of monetarism friedman 1984 has countered this argument by relating the velocity decline in part to the unprecedented volatility of money growth following the federal reserve s 1979 shift to nonborrowed reserves targeting implicit in friedman s reasoning is that general uncertainty regarding money growth enters as an important argument in the public s money demand function thus friedman explains the 1982 velocity decline does not undermine monetarism rather it reflects one aspect of general portfolio readjustment under conditions of extreme perceived monetary uncertainty and the elnancial instability that characterized the period using quarterly data from 1963 i through 1984 ii hall and noble granger test the friedman hypothesis by estimating the following regression

the demand for money in some major opec members regression estimates and stability results numerous studies have empirically examined the money demand function in several developed and developing countries however money demand functions in the opec economies have been largely ignored this paper estimates appropriate money demand equations for three opec economies namely saudi arabia libya and nigeria the open economy nature of the money demand model and its structural stability are stressed and tested over the quarterly period 1963 to 1979 the estimated money demand equations for the three countries fit the data quite well and exhibit sturctural stability importantly the inclusion of a variable representing foreign monetary influence into the estimated equations appears necessary for the stability result to emerge

on the implications of market power in banking evidence from developing countries abstract this paper investigates how different degrees of market power affect bank efficiency and stability in the context of developing economies it sheds light on the competition stability nexus by documenting and analyzing the complex interactions between a tripod of variables that are central for regulators the degree of market power bank cost and profit efficiency and overall firm stability the results show that an increase in the degree of market power leads to greater bank stability and enhanced profit efficiency despite significant cost efficiency losses the findings lend empirical justification to the traditional view that increased competition may undermine bank stability and may bear significant implications for stressed banking systems in developing economies

voters private valuation of candidates quality abstract different voters might have different valuations of candidates qualitative features we argue that this intuitive fact acts as a strong stabilizing force in electoral competition dynamics when candidates are office motivated pure strategy equilibria may exist unlike when all voters favor the same candidate perhaps more importantly it affects candidates platform moderation incentives in a rather intriguing manner when voters are evenly split in terms of their candidates quality valuations then both candidates have incentives to locate sufficiently near but not necessarily exactly at the center of the policy space however as the number of voters who favor the same candidate rises maximum equilibrium differentiation follows a non trivial u shaped pattern it is first decreasing and then increasing in the fraction of voters who prefer the more popular candidate

how rising competition among microfinance institutions affects incumbent lenders this article uses data from uganda s largest incumbent microfinance institution to analyse the impact of entry by competing lenders on client behaviour we observe that rising competition does not lead to an increase in client dropout rate but induces a decline in repayment performance and savings deposited with the incumbent suggesting rising multiple loan taking by clients this joint effect on dropout and repayment is consistent with some negative information about clients and is being shared across lenders however the observed decline in repayment rates in a context of rising multiple loan taking shows that information sharing about clients is far from complete

credit markets with differences in abilities education distribution and growth this article presents an endogenous growth model in which credit markets affect time allocation of individuals with different educational abilities credit markets allow the more able to specialize in studying and the less able to specialize in working this specialization can increase growth and welfare this article also shows that in economies with high low levels of education abilities the opening of credit markets induces a more disperse equal income distribution the role of intergenerational transfers in overcoming the absence of credit markets is also discussed as well as other forms of credit markets imperfections

liquidity coinsurance moral hazard and financial contagion we study the propagation of financial crises between regions characterized by moral hazard problems the source of the problem is that banks are protected by limited liability and may engage in excessive risk taking the regions are affected by negatively correlated liquidity shocks so that liquidity coinsurance is pareto improving the moral hazard problem can be solved if banks are sufficiently capitalized under autarky a limited investment is needed to achieve optimality so that a limited amount of capital is sufficient to prevent risk taking with interbank deposits the optimal investment increases and capital becomes insufficient to prevent excessive risk taking thus bankruptcy occurs with positive probability and the crises spread to other regions via the financial linkages opening the financial markets is nevertheless pareto improving consumers benefit from liquidity coinsurance although they pay the cost of excessive risk taking finally we show that in this framework a completely connected deposit structure is more conducive to financial crises than an incompletely connected structure

interaction between economic and financial development this paper presents a model of financial and economic development which assumes the consumption of real resources by the financial sector financial development occurs endogenously as the economy reaches a critical threshold of economic development compared to financial autarky financial intermediaries allocate savings net of their costs of operation to more productive investments whenever the technology financed by intermediaries is more capital intensive than that operated in financial autarky the growth effect of financial development is ambiguous as a result financial development may be unsustainable however when financial development is sustainable the credit market becomes more competitive and more efficient over time and this could eventually contribute to economic growth nonetheless given monopolistic competition in the financial sector the level of entry into the credit market is generally inefficient for instance with diminishing returns to specialisation entrants might be too few at the early stages of economic development and too many later on

unidimensional downsian politics median utilitarian or what else abstract in this note we show that in the probabilistic version of the standard unidimensional downsian model with two candidates maximizing their expected pluralities there do not exist nash equilibria in pure strategies whenever the probabilistic component is arbitrarily small but not degenerate we argue that empirical research on electoral competition should pay more attention to the magnitude of partisanship in each group of voters since equilibrium predictions will be very sensitive to that specific electoral parameter

the great divide and beyond financial architecture in transition a growing and deepening divide has opened up between transition countries where economic development has taken off and those caught in a vicious cycle of institutional backwardness and macroeconomic instability this great divide is visible in almost every measure of economic performance gdp growth investment government finances growth in inequality general institutional infrastructure and increasingly in measures of financial development strategies for financial development have differed dramatically across countries and over time offering interesting opportunities to study the links between real and financial sector development

the predictive performance of the time series model and the regression model of the income velocity of money this paper provides a comparative study of the relative performance of two models of the income velocity of money a time series model and a regression model using quarterly data from five eec countries our empirical results show that the regression model provides more accurate in sample prediction than the time series model out of sample however the regression model does not consistently outperform the time series model instead a linear composite perdiction combining the predictions from the time series and the regression models appears to perform the best two other results of this paper are 1 the stochastic structure of the income velocity of money can be adequately represented by a random walk with drift model after seasonality is properly accounted for 2 the regression model is temporally unstable for four of the five eec countries

velocity effects of anticipated and unanticipated money growth and its variability the purpose of this paper is to empirically test the relationship between velocity growth and anticipated and unanticipated money growth and its variability in particular by decomposing actual monetary growth into anticipated and unanticipated components the study investigates whether knowledge of past variability of anticipated and unanticipated monetary growth improves the prediction of future velocity growth beyond predictions that are based on past velocity growth alone this is the empirical definition of granger causality comparasions are made in all tests among simple sum and divisia aggregates of m1 m2 m3 and l and with spindt s monetary velocity mq aggregate

dynamic fiscal competition a political economy theory abstract i develop a political economy theory of dynamic fiscal competition via public spending and debt with internationally mobile capital strategic policies generate two cross border externalities that voters in each country fail to internalize 1 an increase in public spending that bolsters capital accumulation but also 2 a race to the top in public debt which crowds out capital the relative size of these two externalities varies with the number of financially integrated countries and interacts with the domestic political conflict between young and old voters despite residence based taxation capital tax rates are lower under strategic policies than under coordination furthermore they may decline with financial integration strategic policies lead to lower long run output and welfare relative to coordination but are preferred by subsequent generations of voters if the number of financially integrated countries is low or the political weight of the young is high

do all countries grow alike abstract this paper investigates the driving forces of output change in 77 countries during the period 1970 2000 a flexible modeling strategy is adopted that accounts for i the inefficient use of resources and ii different production technologies across countries the proposed model can identify technical efficiency and input change for each of three endogenously determined regimes membership in these regimes is estimated rather than determined ex ante this framework enables explorations into the determinants of output growth and convergence issues in each regime

financial contagion and economic development an epidemiological approach abstract we develop an epidemiological approach to analyze how financial contagion may affect and be affected by economic activity we show that according to specific parameter values the economy may converge either to a non speculative or to a speculative equilibrium in the former situation the level of per capita income is maximal while in the latter it is reduced by financial contagion the presence of economic and financial feedback effects may also give rise to macroeconomic fluctuations during the transitional path clearly showing that such economic and financial links are an important driver of the short run macroeconomic performance by extending the analysis to a spatial dimension we also show that financial contagion in some specific region may propagate quickly also in regions far away from those in which the contagion initially occurs highlighting the role of regional policy coordination to avoid interregional contagion

elections and income redistribution this paper has analyzed a model of elections in which each candidate selects a reputation for the distribution of income that can be expected if he is elected the first result established that whenever there are three or more groups of voters and no single group has half or more of the voters if the candidates believe that the voters choices are determined solely by the candidates redistributional reputations then there is no electoral equilibrium the candidates expectations about the voters choices were then reformulated using a qualitative response model the next result established that this alternative model leads to the existence of electoral equilibria the remainder of the paper analyzed the nature of these equilibria for any given electorate among other things the results established that there is always a unique equilibrium provided a simple procedure for finding the precise location of this equilibrium and showed that this location implicitly maximizes the sum of the voters utility functions on the possible income distributions the penultimate sections provided some simple examples which illustrate the main results in the paper and a discussion of these results in terms of the politics of redistribution

integration and competition in the european financial markets abstract financial integration in europe should affect the competition between markets and intermediaries and generate a convergence of both interest rates and margins among different countries this paper analyzes both the evolution of the convergence in interest rates and the level of competition and its inequalities among the european banking systems for the period 1993 2001 the inequality index used the theil index allows us to break down the inequalities into a country and a specialization effect if the former effect dominates it would mean that national banking markets are segmented due to the existence of obstacles or barriers to integration on the other hand dominance of the latter effect would be related to the different level of competition depending on the type of banking specialization

financial liberalization financial sector development and growth evidence from malaysia abstract the objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of malaysia using time series data from 1960 to 2001 we conduct cointegration and causality tests to assess the finance growth link by taking the real interest rate and financial repression into account the empirical evidence suggests that financial liberalization through removing the repressionist policies has a favorable effect in stimulating financial sector development financial depth and economic development are positively related but contrary to the conventional findings our results support robinson s view that output growth leads to higher financial depth in the long run

on the sources of heterogeneity in banking efficiency literature one learns two main lessons from studying the great quantity of banking efficiency literature these lessons regard the heterogeneity in results and the absence of a comprehensive review aimed at understanding the reasons for this variability surprisingly although this issue is well known it has not been systematically analyzed before in order to fill this gap we perform a meta regression analysis mra by examining 1 661 efficiency scores retrieved from 120 papers published over the period 2000 2014 the meta regression is estimated by using the random effects multilevel model reml because it controls for within study and between study heterogeneity the analysis yields four main results firstly parametric methods yield lower levels of banking efficiency than nonparametric studies this holds true even after controlling for the approach used in selecting the inputs and outputs of the frontier secondly we show that banking efficiency is highest when using the value added approach followed by estimates from studies based on the intermediation method whereas those based on the hybrid approach are the lowest thirdly efficiency scores also depend on the quality of studies and on the number of observations and variables used in the primary papers as far as the effects of sample size dimension and quality of papers are concerned there are significant differences in sign and magnitude between parametric and nonparametric studies finally cost efficiency is found to be higher than profit and production efficiency interestingly mra results are robust to the potential outliers in efficiency and sample size distributions