Are funding of pensions and economic growth directly linked? New empirical results for some OECD countries

Abstract

We empirically test on a panel of OECD countries the hypothesis of a direct and positive link between funding of pensions and economic growth, which is based on the idea that richer pension systems can accelerate the development of the financial system and thus promote a more efficient capital allocation. We follow Davis and Hu (2008) [Davis and Hu (2008), Does funding of pensions stimulate economic growth?, Journal of Pension Economic and Finance, Cambridge University Press, vol. 7 (02), 221-249] in estimating a modified Cobb-Douglas production function, where pension fund assets are treated as a shift factor, but we criticize their results from an econometric point of view, since both the Dynamic OLS and Mean Group (MG) estimators are inadequate in case of cross-sectionally correlated residuals. Indeed, we find a highly significant level of correlation in the MG residuals across countriesthat we attribute to common global shocks driving per capita outputs. Therefore we adopt a more general approach suitable to the presence of a multifactor error structure. Our results exclude the existence of a long run cointegration relationship between autonomous (or total) pension fund assets and per capita output for our panel of OECD countries, unless, in contrast to the conclusion of the cross-sectional dependence test, we ignore it and assume independence of residuals.