- The finance-growth nexus: Assess the evidence that the deepening of financial markets in an
emerging economy is essential for sustained economic growth.
A good essay will build on the references used in Lecture 2 (see old Lecture 2 and old Lecture 3),
going beyond evidence of correlation of financial deepening and economic development, and
assessing the evidence of causal links. Credit will be given for assimilating material beyond what
appears on the reading list. - Financial crises: The history of finance suggests that crises are an endemic problem for asset
markets. Explain why you believe this to be the case, and, using examples, discuss whether
emerging markets are more likely to be prone to such episodes than the financial markets of
advanced economies.
The starting point should be the reading list for lecture 3. The work of Reinhart and Rogoff
should help to answer the first part of the question. Some of the work on the nature of asset
market failure is technically demanding (and so we do not expect detailed review), but the Asian
crisis is a very good example of a behaviour in emerging markets. There are plenty of other
examples, such as Greece and Argentina. - Informal markets: Explain why microcredit has little (if no significant) impact on its users.
The fashionability of microcredit has led to some reaction against it. There is a strand of the
literature which is polemical and which typically criticises the lack of macroeconomic effects of
microcredit programes. We recommend that you don’t concentrate on those discussions,
engaging instead with readings which draw on the emerging evidence of randomised control
trials - Islamic finance: “In the wake of the 2008 global financial crisis, it is widely believed that Islamic
Financial Institutions (IFIs) exhibited far greater resilience in comparison to their interest-bearing
counterparts”. Critically examine the role rendered by IFIs in contributing towards a robust
financial system.
You might reasonably answer this question by thinking about the meaning of resilience carefully.
Islamic banking limits the range of contracts which are available, and there is an argument that
to avoid excessive risk, or trade in risk, contracts should be based on the exchange of a real asset.
Does that make financial systems more resilient?
The question also implicitly invites you to consider the ways in which Islamic institutions might
support efficient asset allocation in a market oriented economy. - Multilateral financial institutions: Assess the role of multilateral financial institutions, such as the
World Bank, in the context of the increasing access of emerging markets to private capital.
Key reading: Clemens, Kremer, 2016, The New Role for the World Bank, JEP, 30:1, 53 – 76. Over
the last 25 years, there has been ongoing debate about what the World Bank can achieve given
that it contributes a very small proportion of financial flows to emerging economies. Below the
surface of the debate, there are interesting questions about whether there are elements of
institutional development where social returns are high, but private returns are difficult to
capture, for
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