Financial depth, debt, and growth
Ikonen, Pasi (17.05.2017)
Numero
51Julkaisija
Bank of Finland
2017
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201705171300Tiivistelmä
This thesis applies several econometric methods to a selection of country panels to study how growth is influenced by financial development and government debt. The first part presents the thesis discussion, including a synthesis on financial development, government debt, money supply, and economic growth. The second part deepens the discussion with three stand-alone essays.
The first essay models how financial development affects growth through utilization of technological innovation. Based on explicit modeling of the innovation channel of finance, the results show a significant and positive sign for the interaction term between the measure of a country’s own innovation and financial development in the most important specifications. This suggests that the innovation channel of finance is likely to be positively relevant to growth.
The second essay examines effects of venture capital investment on economic growth in a similar framework. The findings demonstrate that the interaction of venture capital with innovation has a positive and statistically significant coefficient. Further, the joint impact related to venture capital and its interactions is positive in most specifications, suggesting that venture capital is probably a relevant factor for growth.
The third essay delves deeply in the effects of general government debt and general government external debt on growth of real GDP. It explores the long-standing endogeneity problem, includes other relevant debt concepts besides government total debt, revisits the issue whether there are threshold values for the government debt ratio, examines the effect of debt on GDP components and structure, uses timely and extensive datasets and extensive robustness analysis, and runs meta-regressions of the results of this and a many of other studies. Even with correction for endogeneity, the study finds modest evidence of a negative and significant growth impact for government debt. The evidence is not robust over all samples and specifications. The final essay also reports evidence of a negative and significant effect of government external debt in the sample of developed economies. The findings overall comport with those of recent papers that conclude that there is no universal threshold value for a government debt ratio that would hold across all countries. Further, government debt appears to decrease the private-investment-to-GDP ratio, but increases the GDP ratio for household consumption. The meta-regression analysis shows that the study’s results on how specification features affect the estimate of the government debt coefficient are broadly in line with those of other studies.
The first essay models how financial development affects growth through utilization of technological innovation. Based on explicit modeling of the innovation channel of finance, the results show a significant and positive sign for the interaction term between the measure of a country’s own innovation and financial development in the most important specifications. This suggests that the innovation channel of finance is likely to be positively relevant to growth.
The second essay examines effects of venture capital investment on economic growth in a similar framework. The findings demonstrate that the interaction of venture capital with innovation has a positive and statistically significant coefficient. Further, the joint impact related to venture capital and its interactions is positive in most specifications, suggesting that venture capital is probably a relevant factor for growth.
The third essay delves deeply in the effects of general government debt and general government external debt on growth of real GDP. It explores the long-standing endogeneity problem, includes other relevant debt concepts besides government total debt, revisits the issue whether there are threshold values for the government debt ratio, examines the effect of debt on GDP components and structure, uses timely and extensive datasets and extensive robustness analysis, and runs meta-regressions of the results of this and a many of other studies. Even with correction for endogeneity, the study finds modest evidence of a negative and significant growth impact for government debt. The evidence is not robust over all samples and specifications. The final essay also reports evidence of a negative and significant effect of government external debt in the sample of developed economies. The findings overall comport with those of recent papers that conclude that there is no universal threshold value for a government debt ratio that would hold across all countries. Further, government debt appears to decrease the private-investment-to-GDP ratio, but increases the GDP ratio for household consumption. The meta-regression analysis shows that the study’s results on how specification features affect the estimate of the government debt coefficient are broadly in line with those of other studies.
Sisällysluettelo
Abstract 3
Tiivistelmä 5
Acknowledgements 7
Introduction 11
1 On growth theories 14
2 Effect of finance on economic growth 16
2.1 How financial development affects growth 16
2.2 Effect of venture capital on growth 24
3 How government debt affects growth 26
4 A synthesis of financial development, government debt, money supply, and economic growth 35
5 Methodological issues 42
5.1 Estimation 42
5.2 Endogeneity 43
5.3 Analysis of endogeneity risks of government debt and private credit 46
5.4 Autocorrelation 47
5.5 Non-stationarity and multicollinearity 48
References 51
6 Effect of finance in driving growth through technological innovation 63
6.1 Introduction 63
6.2 Estimation and results 65
6.2.1 Specification and data 65
6.2.2 Methodology 73
6.2.3 Replicating the AHM results 74
6.2.4 Main results 77
6.2.5 Robustness checks 91
6.2.6 Own innovation vs. fixed effects 96
6.3 Conclusions 98
References 101
Appendix 105
7 Effect of venture capital investment in driving economic growth 107
7.1 Introduction 107
7.1.1 Theoretical considerations and previous studies on venture capital 107
7.1.2 Purpose and structure of study 110
7.2 Data 110
7.3 Estimation 112
7.3.1 Regression equation 112
7.3.2 Methodology 114
7.4 Results 117
7.4.1 General 117
7.4.2 Venture capital and its interaction terms with other variables 119
7.4.3 Other variables 128
7.4.4 Robustness checks 130
7.5 Conclusions 130
References 132
8 Effect of government debt and external government debt as constraints on growth 135
8.1 Introduction 135
8.2 Data 141
8.3 Estimation 147
8.4 Results 149
8.4.1 Simple regression models 149
8.4.2 Baseline regressions 155
8.4.3 Longer lags as regressors and IV estimation 157
8.4.4 Cross-sectional regressions 160
8.4.5 Meta-regressions 172
8.5 Conclusions 179
References 182
Appendix 185
Tiivistelmä 5
Acknowledgements 7
Introduction 11
1 On growth theories 14
2 Effect of finance on economic growth 16
2.1 How financial development affects growth 16
2.2 Effect of venture capital on growth 24
3 How government debt affects growth 26
4 A synthesis of financial development, government debt, money supply, and economic growth 35
5 Methodological issues 42
5.1 Estimation 42
5.2 Endogeneity 43
5.3 Analysis of endogeneity risks of government debt and private credit 46
5.4 Autocorrelation 47
5.5 Non-stationarity and multicollinearity 48
References 51
6 Effect of finance in driving growth through technological innovation 63
6.1 Introduction 63
6.2 Estimation and results 65
6.2.1 Specification and data 65
6.2.2 Methodology 73
6.2.3 Replicating the AHM results 74
6.2.4 Main results 77
6.2.5 Robustness checks 91
6.2.6 Own innovation vs. fixed effects 96
6.3 Conclusions 98
References 101
Appendix 105
7 Effect of venture capital investment in driving economic growth 107
7.1 Introduction 107
7.1.1 Theoretical considerations and previous studies on venture capital 107
7.1.2 Purpose and structure of study 110
7.2 Data 110
7.3 Estimation 112
7.3.1 Regression equation 112
7.3.2 Methodology 114
7.4 Results 117
7.4.1 General 117
7.4.2 Venture capital and its interaction terms with other variables 119
7.4.3 Other variables 128
7.4.4 Robustness checks 130
7.5 Conclusions 130
References 132
8 Effect of government debt and external government debt as constraints on growth 135
8.1 Introduction 135
8.2 Data 141
8.3 Estimation 147
8.4 Results 149
8.4.1 Simple regression models 149
8.4.2 Baseline regressions 155
8.4.3 Longer lags as regressors and IV estimation 157
8.4.4 Cross-sectional regressions 160
8.4.5 Meta-regressions 172
8.5 Conclusions 179
References 182
Appendix 185