The effect of financial development on economic growth: a meta-analysis

In this article, we contribute to the current debate on the sign and size of the finance–growth relation. To this purpose, we use a meta-analysis with 551 estimates from 68 empirical studies that take private credit to GDP as a measure for financial development. We distinguish between linear and logarithmic specifications. First, we find evidence of significantly positive publication bias in both the linear and log-linear specifications. It suggests the literature has exaggerated the size of the finance–growth effect in the past. Second, we find suggestive evidence that the logarithmic specification is superior to the linear specification. In the logarithmic specification when accounting for publication bias, a 10% increase in credit to the private sector increases economic growth with 0.09 percentage points. For the linear estimates, no significant effect of credit to the private sector on economic growth is found on average. Overall, the evidence points to a positive but decreasing effect of financial development on growth and supports the ‘too much’ finance hypothesis.     

Patching up the Pact

The paper considers the implications for the EU accession candidates of Central and Eastern Europe of the fiscal‐financial constraints imposed by the Stability and Growth Pact and the Maastricht Treaty. Our findings apply also to those current EU members whose initial conditions (e.g., infrastructure and progress in state pension reform) or other structural characteristics (e.g., demographic structure, growth potential, Balassa‐Samuelson equilibrium real exchange rate appreciation) differ significantly from the EU average. We find the existing criteria to be seriously flawed and propose an alternative rule, the Permanent Balance Rule, based on a strong form of tax smoothing.     

Genuine Savings Rates in Developing Countries

Augmented measures of savings and wealth in the national accountsare critical to conceptualizing and achieving sustainable development.After developing the theory of genuine savings—traditionalnet savings less the value of resource depletion and environmentaldegradation plus the value of investment in human capital—thisarticle presents empirical estimates for developing countries.These calculations account for resource depletion and carbondioxide emissions, using consistent time series data for 1970–93.The empirical evidence shows that levels of genuine savingsare negative in a wide range of countries, particularly in Sub-SaharanAfrica, and that these countries are being progressively impoverished.Increasing the coverage of natural resources and pollutantsin our calculations would reduce the estimated levels of genuinesavings overall. The use of genuine savings measures suggestsa series of policy questions that are key to sustaining development.These are also explored, specifically the extent to which monetaryand fiscal policies, exports of exhaustible resources, strongerresource policies, and pollution abatement measures boost genuinesavings rates. For policymakers, linking sustainable developmentto genuine savings rates means that there are many possibleinterventions to increase sustainability, from the macroeconomicto the purely environmental.     

Tail Estimates and the Ems Target Zone*

Characteristically, distributions of exchange-rate returns are fat-tailed. We use a nonparametric tail-index estimator based on extreme value theory for seven EMS currencies between April 1979 and October 1991. We find that the behavior of the Belgian franc, the Danish Krone, the French franc, and the Italian lira has become significantly less fat-tailed over time. We attribute this to the decline in the exchange-rate variance as observed in the EMS, which according to the target-zone literature should lead to a convergence of fixed exchange-rate behavior to that of floating rates. A comparison of tail estimates for the Deutsche mark and dollar exchange rates supports this notion.     

On the Effects of Redistribution on Growth and Entrepreneurial Risk-taking

This paper investigates the effects of redistributive taxation on occupational choice and growth. We discuss a two-sector economy in the spirit of Romer (1990). Agents engage in one of two alternative occupations: either self-employment in an intermediate goods sector characterized by monopolistic competition, or employment as an ordinary worker in this sector. Entrepreneurial profits are stochastic. The occupational choice under risk endogenizes the number of firms in the intermediate goods industry. While the presence of entrepreneurial risk results in a suboptimally low number of firms and depresses growth, nonlinear tax schemes can sometimes compensate negative effects by ex post providing social insurance.     

Tax evasion, tax avoidance and shadow economy: introduction

This introduction summarizes the content of the papers published in this volumes.     

Internationalization and business tax revenue—evidence from Germany

The ongoing internationalization of business activity fuels concerns that governments may lose their ability to tax business income. By using data on sixteen German states from 1970 to 2005, we estimate the impact of internationalization, measured by trade volumes and stocks of foreign direct investment, on business tax revenues. We control for the impact of internationalization on business profits. Surprisingly, we find strong and robust evidence for a positive impact of internationalization on tax revenue. An increase in the internationalization indicator of ten percent increases tax revenue by over three percent. This counterintuitive result may be explained by higher tax avoidance activity of purely national firms or by legal provisions in the tax law which can be used as tax loopholes in the case of domestic transactions as opposed to cross-border transactions.