This dissertation includes three chapters. Chapter 2 focuses on the threshold effect of credit on economic development of 17 developed countries throughout history from the late 1800s. Chapter 3 re-investigates the role of foreign aid in developing countries, emphasising the diminishing returns, and Chapter 4 offers evidence on the interest rate threshold effect on housing prices in 17 advanced economies from 1870 to 2013. Chapter 2 investigates the impact of bank credit on economic growth using the dynamic threshold panel model on 17 developed countries for the period from the late 1800s to the most recent period (2013). Recent papers suggest that credit ha a non-linear effects on economic growth in the long-run, where the turning points are identified around 80-100% of GDP. This study aims to capture the behaviour of the short-run impact of credit-to-GDP ratio on economic growth, particularly in advanced economies. The results show that there exists credit threshold effects, in which 135% of credit to GDP is the threshold level. An inverted U-shaped relationship between bank credit and economic growth appears to be statistically significant in the sample period after World War II. Chapter 3 re-examines the impact of foreign aid on economic development using a sample of 71 developing countries for the period from 1967 to 2010. It contributes to the existing literature of the diminishing returns of foreign aid, taking into account the presence of heterogeneity of country's growth process. First, when applying panel data estimation techniques, the results are in-line with previous findings presenting diminishing returns of foreign aid. This is consistent with the concept of absorptive capacity of recipient countries where aid is no longer effective when it reaches a certain threshold. Second, under the Finite Mixture Model in which heterogeneity of a country's growth process is taken into account based on the similarity of the conditional distributions of the growth rates, there exists evidence supporting the existence of two groups of countries, each with its own distinct growth regime. The diminishing returns of foreign aid belong to one group, consisting of 20 countries. There is no statistical evidence to support the diminishing returns for the other group of countries. This implies that the assessment on aid effectiveness should take heterogeneity assumption into account. Chapter 4 investigates the relationship between interest rates and house prices using data from 17 advanced economies for the period from the late 1800s to 2013, based on the recent argument that the linkage follows non-linear assumptions. This study aims to explore whether there exists an interest rate threshold when following a dynamic threshold panel model. The empirical analyses provide evidence that there exists an interest rate threshold, and these findings reveal that expansionary monetary policy below the threshold level is associated with housing price bubbles; beyond the threshold level, further contractionary monetary policy tends to slow down the housing price bubbles, where the effects have become stronger and statistically significant after World War II.
Dynamic threshold panel, finite mixture model, economic growth, private sector credit, foreign aid, house prices, monetary policy
Networked Digital Library of Theses and Dissertations