nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒09‒17
eight papers chosen by
Georg Man

  1. Long-Term Finance and Economic Development: The Role of Liquidity in Corporate Debt Markets By Julian Kozlowski
  2. Development state evolving: Japan's graduation from a middle income country By Tetsuji Okazaki
  3. The Determinants of Foreign Direct Investment in sub-Saharan Africa: What Role for Governance? By Andres Rodrigues-Pose; Gilles Cols
  4. Determinants of Financial Inclusion in Africa: A Dynamic Panel Data Approach By Evans, Olaniyi
  5. Formal and informal household savings: how does trust in financial institutions influence the choice of saving instruments? By Beckmann, Elisabeth; Mare, Davide Salvatore
  6. Development Financing and Economic Governance: Analysis of the Liquidity Crisis and Circularity Debts in Pakistan By Khan, Dr. Muhammad Irfan; Mehar, Dr. Muhammad Ayub; Iqbal, Dr. Athar Iqbal
  7. Bank Credit Allocation and Sectorial Concentration in Mexico: Some Empirical Evidence By Ramos Francia Manuel; García-Verdú Santiago
  8. Towards a more efficient use of multilateral development banks’ capital By Riccardo Settimo

  1. By: Julian Kozlowski (New York University)
    Abstract: What are the linkages between maturity of corporate debt, liquidity of financial markets and the real economy? Firms in developing countries borrow at shorter maturities and those assets are traded in less liquid markets, relative to advance economies. To understand these facts, this paper studies how firms choose and finance investment projects in a production economy subject to an over-the-counter trading friction in financial markets and a time-to-build constraint on investment. Long-term assets rely on the possibility of being traded in secondary markets. Hence, the credit spread due to liquidity increases with the maturity of the asset, which generates an upward sloping yield curve. As a result, an improvement in market liquidity flattens the yield curve and benefits long-term borrowing. On the other hand, investment choices depend on financial costs. The time-to-build constraint implies that in order to produce a more profitable firm, an entrepreneur needs borrowing for a longer period of time. Hence, when borrowing costs at longer horizons decline, firms invest in more profitable longer-term projects. To evaluate the quantitative importance of this mechanism, I calibrate the model to match the US corporate debt market. Counterfactual exercises show that the liquidity of the secondary market can account for variations in maturity choices of 30.
    Date: 2017
  2. By: Tetsuji Okazaki
    Abstract: This paper reexamines the industrial policy in postwar Japan from perspectives of the literature on a "development state" and a "middle income trap". Japan transited from a middle income country to a high income country in the period from the 1950s to the 1970s. This process was characterized by a large structural change, such as resource reallocation from the primary industry to the secondary and the tertiary industries as well as resource reallocation within the secondary industry. Transition to a high income country is a challenging task for a middle income country. With respect to Japan, the industrial policy played a positive role in the transition. This was achieved by interactions between MITI and other related actors, who constrained and corrected MITI's attempts of excess intervention.
    Date: 2017–08
  3. By: Andres Rodrigues-Pose; Gilles Cols
    Abstract: For the past quarter of a century, foreign direct investment (FDI) flows have grown exponentially across the world. Sub-Saharan Africa has, however, lagged behind and only lured on average a mere 2% of global FDI. The investment that the region attracts tends, moreover, to be concentrated in a number of commodity-rich countries. Natural resources and the size of national markets have generally been considered as the main drivers of FDI. The quality of local institutions has, by contrast, attracted less attention. This paper uses institutional data for 22 countries in order to demonstrate that the quality of governance plays a far from negligible and enduring role in the distribution of FDI in sub-Saharan Africa. It is shown that factors such as political stability, government effectiveness, lower corruption, voice and accountability, and the rule of law not only are more important determinants of FDI than the size of local markets, but also that their influence on the capacity of African countries to attract FDI is long-lasting.
    Keywords: Foreign direct investment (FDI), good governance, institutions, markets, natural resources, sub-Saharan Africa
    Date: 2017–09
  4. By: Evans, Olaniyi
    Abstract: This study documents the determinants of financial inclusion in Africa for the period 2005 to 2014, using the dynamic panel data approach. The study finds that per capita income, broad money (% of GDP), literacy, internet access and Islamic banking presence and activity are significant factors explaining the level of financial inclusion in Africa. Domestic credit provided by financial sector (% of GDP), deposit interest rates, inflation and population have insignificant impacts on financial inclusion. The findings of this study are of utmost value to African central banks, policymakers and commercial bankers as they advance innovative approaches to enhance the involvement of excluded poor people in formal finance in Africa.
    Keywords: Financial inclusion, finance, dynamic panel data, Africa
    JEL: G2 O1 O16 O17
    Date: 2016
  5. By: Beckmann, Elisabeth; Mare, Davide Salvatore
    Abstract: We investigate whether trust in different financial institutions influences the choice of saving instruments. Is trust a significant determinant of household saving behavior? How does trust in different financial institutions affect the composition of household savings? Using unique survey data for ten emerging market economies in Central, Eastern and Southeastern Europe, we show that trust in the financial system increases the probability of holding formal savings and the diversification among formal saving instruments. Trust in the financial system and in foreign banks are significantly associated with holding contractual and capital market saving instruments. Trust in the safety of deposit has the largest positive effect on bank savings. Trust in domestic banks increases the likelihood of holding formal savings the most and trust in foreign banks decreases holdings of informal savings the most.
    Keywords: Household finance; Formal savings; Informal savings; Trust in banks; Trust in the financial system.
    JEL: D12 D14 G11 O16 P34
    Date: 2017–08–01
  6. By: Khan, Dr. Muhammad Irfan; Mehar, Dr. Muhammad Ayub; Iqbal, Dr. Athar Iqbal
    Abstract: Purpose: This paper is based on the models derived by the researchers to explain the patterns of corporate governance, firms’ financial policies and liquidity position. Methodology: A deductive approach has been adopted to reconcile and examine the different models of corporate governance and firms’ financial policies. Findings: The study showed that corporate savings is a good predictor of the macro level investment in a country. The magnitude of national investment will increase by improvement in corporate savings. In fact the corporate savings indicate the expansion in business activities which may be an indicator of the trust and confidence of private sector. On the other hand it explains the financial health of corporate sector, which may provide the significant portion of tax revenue to the government for developing projects in public sector. The study has concluded that corporate governance is a significant variable in determining the liquidity and circularity debts. In this way corporate governance becomes a crucial determinant of the national investment. Implications:The bad corporate governance may deteriorate the investment activities at national level, which may damage the economy for a longer term. This study also indicates that capital structure and the patterns of ownership play important role in the determination of corporate governance of an institution.
    Keywords: Corporate Governance, Gross Fixed Capital Formation, Development Finance
    JEL: E60 M48 O10
    Date: 2015–12–12
  7. By: Ramos Francia Manuel; García-Verdú Santiago
    Abstract: We empirically assess the extent to which relative growth rates in labor productivity, output, and wage, and growth in a proxy of firms' concentration can explain relative bank credit growth at a sectorial level in the Mexican economy. To that end, we divide our sectors into two groups based on their average concentration. Then, we estimate a panel regression with fixed effects for each group, positing relative credit growth as dependent variable. We document that changes in concentration growth contribute to explaining relative credit growth, particularly so in the group with high average concentration. However, in the group with low average concentration, relative credit growth seems to be also explained by relative labor productivity, output, and wage growth rates. We also discuss some mechanisms that might explain these results. Such mechanisms could lead to counterproductive dynamics between concentration growth and relative credit growth, for which we provide some empirical evidence.
    Keywords: Credit;Concentration;Productivity;Mexico
    JEL: E51 J24 L13
    Date: 2017–08
  8. By: Riccardo Settimo (Bank of Italy)
    Abstract: The increasing financing needs of the Sustainable Development Goals (SDGs), coupled with factors likely to restrain in the near future the growth of multilateral development banks’ (MDBs) own resources, call for maximizing capital efficiency. Focusing on 7 major MDBs – the IBRD, IFC, AfDB, EBRD, EIB, ADB and IADB – this paper contributes to this debate by: (a) quantifying their aggregate available lending capacity(capital resources and ratings being unchanged); (b) providing a preliminary estimate of the impact on these banks’ lending capacity if rating agencies (in particular, Standard and Poor’s) were to refine their methodologies to take into account ‘preferred creditor status’ and ‘single name concentration’, as suggested by other researchers. The analysis is replicated assuming that MDBs target an AA+ rating. The paper shows that appropriately refining rating procedures may indeed increase MDBs’ current overall lending capacity significantly, under both ‘triple-A’ and ‘AA+’ scenarios. At the same time, it makes clear that MDBs alone cannot satisfy what are anticipated to be the very substantial financing needs of SDG-related investments.
    Keywords: multilateral development banks, preferred creditor status, single name concentration, credit ratings, rating agencies, 2030 development agenda
    JEL: F53 G24 O19
    Date: 2017–09

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