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Mr. Jahangir Aziz
The standard growth accounting framework, which weights various inputs by their factor shares to measure their contributions to output growth, is known to underestimate the contribution of inputs in the presence of externalities and increasing returns. This paper develops a model in which, in the absence of such departures from the standard neoclassical framework, growth can occur through either embodied technological progress or firms replication of existing technology. The standard growth accounting framework fails to distinguish between these contrasting development processes. This failure thus reveals another limitation to the use of growth accounting in identifying the processes of economic developments.
International Monetary Fund

Abstract

The spectacular growth of many economies in East Asia over the past 30 years has amazed the economics profession and has evoked a torrent of books and articles attempting to explain the phenomenon. Articles on why the most successful economies of the region Hong Kong, Korea, Singapore, and Taiwan Province of China have grown, to say the least, robustly invariably refer to the phenomenon as “miraculous.” When practitioners of the Dismal Science have recourse to a Higher Power, the reader knows that he is in trouble. Confusion is compounded when he discovers that ideological debate has multiplied even further the analyses of this phenomenon. Rather than swelling the torrent of interpretations, this paper sets for itself the modest agenda of reviewing the weightiest arguments in the literature that attempt to identify the reasons for the extraordinary economic growth in East Asia and trying to decide which arguments make sense. The exercise has value because finding the right explanation might suggest how to replicate this success elsewhere and, as a bonus, might also satisfy the reader’s urge to solve an engaging intellectual puzzle. It is best if we start with the facts.

Ms. Laura Valderrama
This paper studies the effect of individual uncertainty on collective decision-making to implement innovation. We show how individual uncertainty creates a bias for the status quo even under irreversible voting decisions, in contrast with Fernandez and Rodrik (1991). Blocking innovation is rooted in the aversion to the potential loss of political clout in future voting decisions. Thus, risk neutral individuals exhibit what we call political risk aversion. Yet individual uncertainty is not all bad news as it may open the door to institutional reform. We endogenize institutional reform and show a non-monotonic relationship between institutional efficiency and the size of innovation.
Mr. Bulent Unel and Mr. Harm Zebregs
China's growth record since the start of its economic reforms in 1978 has been extraordinary. Yet, this impressive performance has been associated with an increasing regional income disparity. We use a recently developed nonparametric approach to analyze the variation in labor productivity growth across China's provinces. This approach imposes less structure on the data than the standard growth accounting framework and allows for a breakdown of labor productivity into capital deepening, efficiency gains, and technological progress. Like other studies before us, we do not find strong evidence of convergence in labor productivity across China's provinces during 1978-98. However, our results show that provinces converged in efficiency levels, while they diverged in capital deepening and technological progress.
Mr. Michael Sarel
This paper examines the dynamics of economic growth. First, it demonstrates that the standard neoclassical growth model with constant elasticity of intertemporal substitution is not consistent with the patterns of development we observe in the real world, once we consider the initial conditions. Second, it examines an alternative growth model, which is consistent with endogenously determined initial conditions and also generates dynamics that are in accord with the historical patterns of growth rates, capital flows, savings rates and labor supply. The alternative model is a generalized version of the neoclassical growth model, with increasing rates of intertemporal substitution due to a Stone-Geary type of utility.
Mr. Bernhard Eckwert and Mr. Burkhard Drees
This paper analyzes the dynamic interactions between the precision of information, technological development, and welfare within an overlapping generations model. More precise information about idiosyncratic production shocks has ambiguous effects on technological progress and welfare, which depend critically on the risk sharing capacity of the economy's financial system. For example, we show that with efficient risk sharing more precise information adversely affects the equilibrium risk allocation and creates a negative uncertainty-related welfare effect, at the same time as it accelerates technological progress and increases R&D investment.
Bin Grace Li, James McAndrews, and Zhu Wang
It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time. We address these puzzles by studying payments system evolution with a dynamic model in a twosided market setting. We calibrate the model to the U.S. payment card data, and conduct welfare and policy analysis. Our analysis shows that the market power of electronic payment networks plays important roles in explaining the slow adoption and asymmetric price changes, and the welfare impact of regulations may vary significantly through the endogenous R&D channel.