nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2017‒12‒03
seven papers chosen by
Georg Man

  1. Innovation, Finance, and Economic Growth: An Agent-Based Approach By Giorgio Fagiolo; Daniele Giachini; Andrea Roventini
  2. Financing Ventures By Greenwood, Jeremy; Han, Pengfei; Sanchez, Juan M.
  3. Bankruptcy Technology, Finance, and Entrepreneurship By Nelson Sobrinho
  4. Financial Inclusion and Economic Growth in WAEMU: A Multiscale Heterogeneity Panel Causality Approach By Gourène, Grakolet Arnold Zamereith; Mendy, Pierre
  5. Does Household Finance Matter? Small Financial Errors with Large Social Costs By Bhamra, Harjoat Singh; Uppal, Raman
  6. Finance and the Misallocation of Scientific, Engineering and Mathematical Talent By Giovanni Marin; Francesco Vona
  7. Macroeconomic implications of financial imperfections: A survey By Stijn Claessens; M. Ayhan Kose

  1. By: Giorgio Fagiolo; Daniele Giachini; Andrea Roventini
    Abstract: This paper extends the endogenous-growth agent-based model in Fagiolo and Dosi (2003) to study the finance-growth nexus. We explore industries where firms produce a homogeneous good using existing technologies, perform R&D activities to introduce new techniques, and imitate the most productive practices. Unlike the original model, we assume that both exploration and imitation require resources provided by banks, which pool agent savings and finance new projects via loans. We find that banking activity has a positive impact on growth. However, excessive financialization can hamper growth. Indeed, we find a significant and robust inverted-U shaped relation between financial depth and growth. Overall, our results stress the fundamental (and still poorly understood) role played by innovation in the finance-growth nexus.
    Keywords: Agent-based Models, Innovation, Exploration vs. Exploitation, Endogenous Growth, Banking Sector, Finance-Growth Nexus
    Date: 2017–11–24
  2. By: Greenwood, Jeremy (University of Pennsylvania); Han, Pengfei; Sanchez, Juan M. (Federal Reserve Bank of St. Louis)
    Abstract: The relationship between venture capital and growth is examined using an endogenous growth model incorporating dynamic contracts between entrepreneurs and venture capitalists. At each stage of financing, venture capitalists evaluate the viability of startups. If viable, VCs provide funding for the next stage. The success of a project depends on the amount of funding. The model is confronted with stylized facts about venture capital; viz., the average cash-on-cash multiple and statistics by funding round concerning the success rate, failure rate, investment rate, equity shares, and the value of an IPO. Raising capital gains taxation reduces growth and welfare.
    Date: 2017–08–01
  3. By: Nelson Sobrinho
    Abstract: Using an overlapping-generations growth model featuring financial intermediation, I find that inefficiencies in technology to deal with private debt distress (bankruptcy technology), and obstacles to entrepreneurship (high costs of doing business) have significant negative effects on the income per capita and welfare of developing countries. These inefficiencies may also interact in perverse ways, futher amplifying the negagtive effects in the long run. The results provide strong rationale for structural reforms that simultaneously speed up the resolution of private sector insolvency, improve creditor protection, and eliminate obstacles to entrepreneurship.
    Date: 2017–08–10
  4. By: Gourène, Grakolet Arnold Zamereith; Mendy, Pierre
    Abstract: This paper examines the causal relationship between Financial Inclusion and economic growth in the West African Economic and Monetary Union (WAEMU) from 2006 to 2015. We combined the heterogeneity panel causality test proposed by Dimitrescu and Hurlin (2012) with the Maximal Overlap Discrete Wavelet Transform (MODWT) to analyze the bi-directional causality at different time scales. We used two Financial Inclusion indicators: the overall rate of demographic penetration of financial services and the overall rate of use of financial services. Our results show that at scale 1 (2-4 years), there is no causality between economic growth and Financial Inclusion indicators. However, at scale 2 (4-8 years), we found a bi-directional causality between economic growth and Financial Inclusion. Policymakers should, therefore, while promoting Financial Inclusion reforms that are beneficial to Financial Inclusion, make more efficient the levers favoring macroeconomic growth, which also seems to be a decisive factor of Financial Inclusion.
    Keywords: Financial Inclusion, Economic Growth, Time Scales, Heterogeneity Panel Causality, MODWT.
    JEL: C00 G2 O1
    Date: 2017
  5. By: Bhamra, Harjoat Singh; Uppal, Raman
    Abstract: Households with familiarity biases tilt their portfolios toward a few risky assets. Consequently, household portfolios are underdiversified and excessively volatile. To understand the implications of underdiversification for social welfare, we solve in closed form a model of a stochastic, dynamic, general-equilibrium economy with a large number of heterogeneous firms and households that bias their investments toward a few familiar assets. We find that the direct mean-variance loss from holding an underdiversified portfolio that is excessively risky is equivalent to a reduction of 1.66% per annum in a household's portfolio return, consistent with the estimate in Calvet, Campbell, and Sodini(2007). However, we show that in a more general model with intertemporal consumption, underdiversified portfolios increase consumption-growth volatility, amplifying the mean-variance losses by a factor of four. Moreover, in general equilibrium where growth is endogenous, underdiversified portfolios distort also aggregate investment and growth even when familiarity biases in portfolios cancel out across households. We find that the overall social welfare loss is about six times as large as the direct mean-variance loss. Our results illustrate that financial markets are not a mere sideshow to the real economy and that financial literacy, regulation, and innovation that improve the financial decisions of households can have a significant positive impact on social welfare.
    Keywords: familiarity bias; growth; Portfolio choice; social welfare; underdiversification
    JEL: E44 G02 G11
    Date: 2017–11
  6. By: Giovanni Marin (University of Urbino "Carlo Bo"; SEEDS, Ferrara, Italy.); Francesco Vona (OFCE, Sciences Po Paris, France)
    Abstract: The US financial sector has become a magnet for the brightest graduates in the science, technology, engineering and mathematical fields (STEM). We provide quantitative bases for this well-known fact and illustrate its consequences for the productivity growth in other sectors over the period 1980-2014. First, we find that the share of STEM talents grew significantly faster in finance than in other key STEM sectors such as high-tech, and this divergent pattern has been more evident for STEM than for general skills and more pronounced for investment banking. Second, this trend did not reverse after the Great Recession, and a persistent wage premium is found for STEM graduates working in finance and especially in typical financial jobs at the top of the wage distribution. Third, the brain drain of STEM talents into finance has been associated with a cumulative loss of labor productivity growth of 6.6% in the manufacturing sectors. Our results suggest that increasing the number of STEM graduates may not be enough to reignite sluggish economic growth without making their employment in finance more costly.
    Keywords: Finance, skills, STEM workers, brain drain, productivity
    JEL: Q52 Q48 H23 D22
    Date: 2017–11–22
  7. By: Stijn Claessens; M. Ayhan Kose
    Abstract: This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers’ balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasises the implications of changes in financial intermediaries’ balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain.
    Keywords: Asset prices, balance sheets, credit, financial accelerator, financial intermediation, financial linkages, international linkages, leverage, liquidity, macro-financial linkages, output, real-financial linkages.
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–11

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