Three essays on growth theory
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This dissertation consists of three essays on growth theory and examines two issues: how financial structure affects the real economic performance and why inflation rates influence growth in a nonlinear way. The first essay addresses the impact of financial structure on the long run growth in an endogenous growth model through introducing financial markets to an economy where banking system is the only source of financing. We show that how financial structure change from a banking system to one where banking and market financing coexist affects economic growth depends on the tradeoff between two forms of interaction between banks and markets: one is competing and the other is complementary. Given the concave preference in the domain of losses, we demonstrate that there exists an capital stock threshold over which competing effect is so dominant that changing to a financial system with banks and markets will have an adverse effect on the economic growth; while below which the complimentary effect turns into dominant and the growth effect of this financial structure change may be positive. The capital stock threshold enable this essay to shed some lights into the dynamics of the impact of financial structure on real sectors. The second essay tests the results derived in the first essay by applying the Caner and Hansen's (2004) instrumental-variable threshold regression approach and using data for 40 countries over period 1976-1998. The evidence strongly supports the view that the relationship between financial structure and economic growth is nonlinear. Further investigation suggests the presence of a capital stock threshold in the function relating economic growth and financial structure. The nonlinear mechanism works as follows: when the capital stock is lower than the threshold, the effect of financial structure on growth is significantly positive; when the capital stock exceeds the threshold, the effect of financial structure turns into negative. Therefore, empirical evidence supports our model conclusions. The third essay presents an endogenous money growth model in which financial system consists of intermediaries and markets. Money is introduced exogenously through nominal financial contracts and the financial friction occurs in the presence of costly screening. Two ingredients enable us to generate new explanations on how inflation rate affects economic growth: nominal interest rate floor restriction and entry cost in financial markets. The analysis shows a nonlinear relationship between the inflation rate and economic growth: at the lower rates of inflation, the effects of inflation on capital accumulation may be positive (Mundell-Tobin effect); at high rates of inflation, the effects of inflation are strongly negative; at extremely high rates of inflation, the marginal impact of inflation on capital growth diminishes rapidly and is still negative. This study also demonstrates the similar nonlinear pattern emerges with regard to welfare effect of inflation.