nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒11‒12
six papers chosen by
Georg Man

  1. Finance and economic growth: financing structure and non-linear impact By Peter, Benczur; Stylianos, Karagiannis; Virmantas, Kvedaras
  2. Financialisation Risks and Econmic Performance By Jérôme Creel; Paul Hubert; Fabien Labondance
  3. What explains output recoveries in developing and emerging market economies after the global financial crisis? By Avendano, Rolando; Daude, Christian
  4. The macroeconomic effects of banking crises: Evidence from the United Kingdom, 1750-1938 By Kenny, Seán; Lennard, Jason; Turner, John D.
  5. Financial Frictions, Trade, and Misallocation By Kohn, David; Leibovici, Fernando; Szkup, Michal
  6. Institutions and Other Determinants of Total Factor Productivity in Sub-Saharan Africa By David Fadiran; Olusegun A. Akanbi

  1. By: Peter, Benczur (European Commission – JRC); Stylianos, Karagiannis (European Commission – JRC); Virmantas, Kvedaras (European Commission – JRC)
    Abstract: There is growing evidence that the impact of financial development on economic growth might be non-linear and hump-shaped, exhibiting a turning point. However, such findings are typically established using total finances (mostly: credit), and the apparent non-linear impact of totals can stem from a substantial structural change in the composition of finances, that has been taking place during the recent decades. Though there are some studies going beyond total finances, they usually look at the impact of certain financing components separately or using ratios, which may bias the estimation and lead to incorrect conclusions. Finally, the findings are typically based on a global pool of countries, and may be driven by a developing versus developed country differential. Focusing on groups of high-income countries (from the OECD, EU, and EMU), this study shows that the finding of a non-linear, hump-shaped impact of financing on economic growth is robust to controlling for financing composition in terms of the sources (bank credit, debt securities, stock market) and the recipients of finances (households, non-financial and financial corporations), or both. In particular, we obtain the following results. (1) The non-linear impact of total bank credit is more pronounced than that of either household credit alone, or the sum of bank credit, debt securities, and stock market financing. (2) Credit to non-financial corporations tends to have a positive, while credit to households a negative impact on growth, even after allowing for non-linearities. (3) Debt-securities and stock market-based financing have a different impact on growth. (4) The estimated turning point of the non-linear relationship is close to that found by Cournède and Denk (2015) for the OECD countries, and lower than that established by Arcand et al. (2015) for a broad set of countries.
    Keywords: financial development; economic growth; finance-growth nexus; non-linearity; bank credit; debt securities; stock markets
    JEL: E44 G2 O4
    Date: 2017–10
  2. By: Jérôme Creel (OFCE, Sciences Po Paris, France); Paul Hubert (OFCE, Sciences Po Paris, France); Fabien Labondance (OFCE, Sciences Po Paris, France)
    Abstract: Drawing on European Union data, this paper assesses the long-standing mainstream view that financialisation improves growth. We measure financialisation with private credit to GDP and capture characteristics of banking sector fragility with the ratio of credit to deposits and the ratio of bank capital to assets. We test the impact of these variables on four measures of economic performance: the growth rates of GDP per capita, consumption per capita, investment and inequality. We observe that credit has no effect on economic performance. However, the potential riskiness of the banking sector measured by the ratio of credit to deposits decreases GDP per capita and contributes to increasing inequality whereas the ratio of capital to assets has a negative impact on GDP per capita growth through its negative effect on investment. This effect is driven by countries with low GDP per capita. We also find that the potential side effects of excessive financialisation have a negative effect on growth.
    Keywords: Private Credit, Banking Sector fragility, Non Performing loans, Bank crisis
    JEL: G10 G21 O40
    Date: 2017–10
  3. By: Avendano, Rolando; Daude, Christian
    Abstract: This paper presents a systematic assessment of the macroeconomic factors associated with differences in GDP dynamics in emerging markets in the aftermath of the global financial crisis. We implement a Bayesian Model Averaging approach to explore the drivers of economic resilience – measured by the output recoveries for a group of 40 emerging economies after 2008, which allows us to account for the uncertainty in the model selection of the relevant variables. Out of a large group of variables used in the literature on balance of payments crises and early warning indicators, we find that a reduced set of variables is systematically associated with output dynamics after the crisis. Countries with overvalued currencies, current account deficits and larger external liabilities before the global financial crisis exhibit systematically weaker output recoveries afterwards. These findings are robust to different definitions of output recovery, the distribution of priors and exclusion of potential outliers. There is also some evidence, but less systematic, that de facto financial openness, links to European banks, and trade openness had a negative impact on output recoveries.
    Keywords: Desarrollo, Economía, Investigación socioeconómica, Sector financiero,
    Date: 2017
  4. By: Kenny, Seán; Lennard, Jason; Turner, John D.
    Abstract: This paper investigates the macroeconomic effects of UK banking crises over the period 1750 to 1938. We construct a new annual banking crisis series using bank failure rate data, which suggests that the incidence of banking crises was every 32 years. Using our new series and a narrative approach to identify exogenous banking crises, we find that industrial production contracts by 8.2 per cent in the year following a crisis. This finding is robust to a battery of checks, including different VAR specifications, different thresholds for the crisis indicator, and the use of a capital-weighted bank failure rate.
    Keywords: banking crisis,bank failures,narrative approach,macroeconomy,United Kingdom
    JEL: E32 E44 G21 N13 N14 N23 N24
    Date: 2017
  5. By: Kohn, David; Leibovici, Fernando; Szkup, Michal
    Abstract: We investigate the extent to which financial frictions shape the aggregate effects of a trade liberalization through their impact on aggregate total factor productivity (TFP) and capital misallocation. We study a small open economy populated with heterogeneous entrepreneurs who differ in their productivity and are subject to financing constraints. Individuals choose whether to be workers or entrepreneurs, and entrepreneurs choose whether to export or not. We show how financial frictions distort these decisions and aggregate TFP. We calibrate the model to match key features of Chilean plant-level data and use it to quantify the TFP losses due to misallocation. We then investigate how the presence of financial constraints affects the output and TFP gains from trade liberalization. We find that lowering trade barriers has a stronger positive effect in less financially developed economies. The higher profits that result from trade liberalizations allow firms to accumulate assets and relax their credit constraint, which is particularly valuable in economies where firms are severely constrained.
    Keywords: Economía, Emprendimiento, Investigación socioeconómica, Productividad, Sector productivo, Comercio, Finanzas,
    Date: 2017
  6. By: David Fadiran; Olusegun A. Akanbi
    Abstract: The primacy of factors of production, such as labour and capital, over Total Factor Productivity (TFP) in stimulating economic growth, has long been a contentious subject in discussions on the underlying causes of economic growth. While the roles of labour and capital have been exhaustively explored, TFP still has room for further exploration, more specifically in sub-Saharan Africa (SSA). This study empirically examines the link between institutions and TFP in SSA, while controlling for other frequently explored variables, for example, research and development, human capital, infrastructure and financial development. The estimations provided in the study are based on a panel of 26 sub-Saharan African countries over the period 1990–2011. We find that, while some of these factors affect TFP in the long-run, there is a consistent relationship with institutions as well. We also find that market-based institutions play a more prominent role than the more frequently explored political institutions.
    Keywords: Total Factor Productivity (TFP), economic growth, Sub-Saharan Africa, market-based institutions, Human Capital, financial development
    Date: 2017–10

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