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on Financial Development and Growth |
| By: | Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw; Narodowy Bank Polski) |
| Abstract: | The Great Recession has resulted in a seemingly permanent level shift in many macroeconomic variables. This paper presents a microfounded general equilibrium model featuring frictional labor markets and financial frictions that generates procyclical R&D expenditures and replicates business cycle features of establishment dynamics. This allows demonstrating the channels through which productivity and financial shocks influence the aggregate endogenous growth rate of the economy, creating level shifts in its balanced growth path. I find that financial shocks are an important driver of the aggregate fluctuations and their influence is especially pronounced for establishment entry. Since the growth rate of the economy can in principle be affected by policy measures, I examine the macroeconomic and welfare effects of applying several subsidy schemes. |
| Keywords: | business cycles, establishment dynamics, endogenous growth, working capital, financial shocks |
| JEL: | E32 G01 J63 J64 O3 O40 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2017-22&r=fdg |
| By: | Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey; Department of Economics, University of Pretoria, South Africa and Montpellier Business School, Montpellier, France.); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Chien-Chiang Lee (Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan); Godwin Olasehinde-Williams (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey) |
| Abstract: | Economic growth may be influenced by insurance-market activity through risk pooling, financial intermediations, indemnification against losses, mobilization of savings and provision of investment opportunities. Over the past few decades, there has been increasing interest in the role of the insurance sector in the economic growth of Africa. This study examines whether there is a causal relationship between the continent’s economic growth and insurance-market activity (life, non-life, and total). Applying panel-estimation techniques that are robust to heterogeneity and cross-sectional dependence to a model of panel data for 11 African countries between 1995 and 2016, we find significant evidence in support of such a relationship. Total-insurance penetration has a long-term impact on economic growth, and when disaggregated into its components (life- and non-life-insurance penetration), we find evidence in support of short-term and long-term impacts on economic growth in both cases. Our study also confirms the feedback hypothesis, as we find a positive, bi-directional causality between insurance-market activity and economic growth. We also find that the contribution from non-life-insurance market activity toward economic growth far outweighs that of life-insurance market activity. |
| Keywords: | Insurance penetration, growth, Africa |
| JEL: | C33 G22 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201801&r=fdg |
| By: | Aßmuth, Pascal |
| Abstract: | The total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. The author examines trend and volatility cycles on the stock market. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm's creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. He asks to which extent a channel may contribute to the stock price-output relation when there is mutual feedback. A model à la Delli Gatti et al. (A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility, 2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank's equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners' influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision ofmanagers they act more prudently and this fosters growth. |
| Keywords: | heterogeneous agents models,financial fragility,stock prices,business cycles |
| JEL: | E32 G30 C63 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:2017108&r=fdg |
| By: | Laura Alfaro (Harvard Business School, Business, Government and the International Economy Unit); Manuel García (Universitat Pompeu Fabra); Enrique Moral-Benito (Banco de Espana) |
| Abstract: | We consider the real effects of bank lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all firms in Spain with a matched bank-firm-loan dataset incorporating information on the universe of corporate loans for 2003-2013. Using methods from the matched employer-employee literature for handling large data sets, we identify bank-specific shocks for each year in our sample. Combining the Spanish Input-Output structure and firm-specific measures of upstream and downstream exposure, we construct firm-specific exogenous credit supply shocks and estimate their direct and indirect effects on real activity. Credit supply shocks have sizable direct and downstream propagation effects on investment and output throughout the period but no significant impact on employment during the expansion period. Downstream propagation effects are quantitatively larger in magnitude than direct effects. The results corroborate the importance of network effects in quantifying the real effects of credit shocks and show that real effects vary during booms and busts. |
| Keywords: | bank-lending channel, matched employer-employee, input-output linkages. |
| JEL: | E44 G21 L25 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:18-052&r=fdg |
| By: | Alfred Duncan; Charles Nolan |
| Abstract: | In this chapter we: (i) Review the core DSGE workhorse models of financial frictions that existed ahead of the recent financial crisis. (ii) Summarize the recent empirical literature on the history of financial crises. (iii) Summarize the key modelling developments around credit intermediation in DSGE models since the crisis. (iv) Identify gaps in the literature that are especially important for policymakers and modelers. |
| Keywords: | Financial Frictions; Credit Intermediation; Macroeconomics |
| JEL: | E32 E44 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1719&r=fdg |