Financial Development and Volatility of Growth Rates: New Evidence

This paper examines the effect of financial development on growth volatility with the dynamic panel data analysis. It demonstrates empirically that financial development has a hump-shaped effect on growth volatility. In early stages of financial development, growth rates are less volatile. As the financial sector develops, an economy is highly volatile. However, as the financial sector matures and the financial market approaches a perfect one, the economy becomes less volatile once again.Growth Volatility; Financial Development; Dynamic Panel Models

Finance and Growth Cycles

This research examines the effect of financial development on volatility in economic growth. It demonstrates theoretically that financial development has a hump-shaped effect on volatility in economic growth. In early stages of the development of a financial sector, growth rates evolve monotonically. At the intermediate level of financial development, as the degree of credit market imperfections diminishes and as asymmetric information between borrowers and lenders is less pronounced, an economy exhibits endogenous growth cycles. However, as the financial sector matures, the volatility in the growth process dissipates and the growth rates evolve once again monotonically.Endogenous Growth Cycles; Financial Deepening; Credit market imperfections; Heterogeneous agents

Financial Globalization and Animal Spirits

Using a multi-country general equilibrium model, we demonstrate that when agents face credit constraints in an international financial market, rational expectations, which are ex-post heterogeneous between countries, cause business fluctuations. If the international financial market becomes perfect, only a unique perfect foresight equilibrium is obtained, implying that no business fluctuations appear.Business fluctuations; Financial globalization; Sunspots; Heterogeneous agents; Rational expectations

Endogenous Growth and Fluctuations in an Overlapping Generations Economy with Credit Market Imperfections

We study the dynamic properties of growth rates in an overlapping generations economy with credit market imperfections. The analysis demonstrates that in early stages of financial development where credit constraints are severe, growth rates evolve monotonically. At the intermediate level of financial development, as the degree of credit market imperfections diminishes, growth rates exhibit endogenous fluctuations for some parameter values. However, as the financial sector matures, fluctuations disappear and the growth rates evolve once again monotonically.Credit market imperfections; Endogenous business fluctuations; Endogenous growth; Heterogeneous agents

Collateral Constraints and Legal Protection of Lenders: A Macroeconomic Perspective

We identify countries that establish collateral-based lending systems with a small-open-economy version of Nobuhiro Kiyotaki and John Moore’s (1997) model. We find that 47 countries in 1980s and 48 countries in 1990s out of 98 countries establish collateral-based lending systems. We also investigate the origin of collateral-based lending systems and find that if a country offers good legal protection for lenders, then a collateral-based lending system is more likely to be embedded in that country.Credit constraints; Collateral-based lending; Legal protection of lenders; Kiyotaki-Moore model

Financial Development, Capital Flow, and Income Differences between Countries

This paper demonstrates with a simple two-country general equilibrium model that the difference in the levels of financial development between countries determines the direction of capital movement and that for some parameter values, if financial markets are integrated internationally, countries with a poorly developed financial sector are never industrialized, while if they had remained closed economies, they would have experienced steady endogenous growth. This result is consistent with a traditional but non-mainstream view of structuralists and gives a theoretical foundation for capital flow regulations which are often imposed by developing countries.Financial development; Capital flow; Income differences between countries; Credit market imperfections; Two-country model

Financial Globalization and Inequality

This paper investigates how financial globalization and financial development affect income inequality within a country. We demonstrate that when a country is financially closed to the world market, the Gini coefficient is monotonically decreasing with respect to the degree of financial development, whereas when a country becomes so small due to financial globalization that financial development in the country does not affect the world interest rate, the Gini coefficient is monotonically increasing with respect to the degree of financial development. A simple quantitative analysis for the Gini coefficients shows that income inequality in the United States is negatively affected by its financial development. In the United States, income inequality has widened since the late-1970s probably due to financial globalization and financial development.Income inequality; Financial globalization; Financial development; Gini coefficient; Heterogeneous agents

Finance and Inequality: How Does Globalization Change Their Relationship?

This research demonstrates that international financial integration changes the way in which financial development affects inequality within a country. Specifically, both the cross-country analysis and the dynamic panel data analysis using data collected from more than 100 countries provide evidence indicating that if the financial market of a country is highly open to the world market, financial development widens inequality within that country, whereas if the financial market of a country is highly closed to the world market, financial development narrows inequality within that country. Our theoretical framework provides a possible explanation for our empirical findings.Financial integration; Inequality; Financial development; Credit constraints; Capital flows

Corruption, Globalization, and Economic Growth: Theory and Evidence

We investigate, both theoretically and empirically, how the negative effects of government corruption on economic growth are magnified or reduced by capital account liberalization. Our model shows that highly corrupt countries impose higher tax rates than do less corrupt countries, thereby, magnifying the negative impacts of government corruption on economic growth in the highly corrupt countries and reducing the impacts in the less corrupt countries if capital account liberalization is enacted. Empirical evidence obtained from an analysis of the panel data collected from 111 countries supports our theoretical predictions. Our theoretical and empirical results contribute to the recent policy debates on the merits or demerits of capital account liberalization.Economic growth; Government Corruption; Capital account liberalization; Two-country model

Sustainable Public Debt, Credit Constraints, and Social Welfare

Whether the sustainability of public debt is promoted or foiled by credit market imperfections depends upon the fiscal policy rules. Under the golden rule, as credit constraints dissipate, public debt is more likely sustainable, whereas under the balanced budget rule, it is less likely sustainable. We also examine the social welfare under the two different fiscal rules. The balanced budget rule is more beneficial to the super-near future generations than the golden rule, whereas the golden rule is more beneficial to the near future generations than the balanced budget rule. However, to the far future generations, the balanced budget rule once again becomes more beneficial than the golden rule.Fiscal sustainability; credit constraints; social welfare; heterogeneous agents endogenous growth