nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒01‒15
seven papers chosen by
Georg Man

  1. Innovation, Finance, and Economic Growth : an agent based approach By Giorgio Ffagiolo; Daniele Giachini; Andrea Roventini
  2. Banking Crises and Investments in Innovation By Oana Peia
  3. Firm Size, Bank Size, and Financial Development By Grechyna, Daryna
  4. Schumpeterian Banks: Credit Reallocation and Capital Structure By Keuschnigg, Christian; Kogler, Michael
  5. Financial Inclusion: New Measurement and Cross-Country Impact Assessment By Cyn-Young Park; Rogelio Mercado Jr.
  6. Macroeconomic Implications of Financial Imperfections: A Survey By Claessens, Stijn; Kose, Ayhan
  7. Asset Prices and Macroeconomic Outcomes: A Survey By Claessens, Stijn; Kose, Ayhan

  1. By: Giorgio Ffagiolo (Scuola Superiore Sant'Anna Pisa Italy); Daniele Giachini (Scuola Superiore Sant'Anna Pisa Italy); Andrea Roventini (Scuola Superiore Sant'Anna Pisa Italy also OFCE Sciences Po Paris)
    Abstract: This paper extends the endogenous-growth agent-based model in Fagiolo and Dosi (2003) to study the finance growthnexus. 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. In- deed, 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
    JEL: C63 G21 O30 O21
    Date: 2017–11–27
  2. By: Oana Peia
    Abstract: This paper proposes a new channel to explain the medium- to long-term effects of banking crises on the real economy. It embeds a banking sector prone to runs in a stylized growth model to show that episodes of bank distress affect not only the volume, but also the composition of firm investment, by disproportionally decreasing investments in innovation. Thishypothesis is confirmed empirically employing industry-level data on R&D spending around 13 recent banking crises episodes. Using difference-in-difference identification strategies, I show that industries that depend more on external finance, in more bank-based economies, invest disproportionally less in R&D following systemic banking crises. These industries also have a lower share of R&D spending in total investment, suggesting a shift in the composition of investment that is specific to recessions following banking crises and not other business cycle recessions.
    Keywords: Banking crises; R&D investment; Financial dependence; Global games
    JEL: G01 G21 E22
    Date: 2017–12
  3. By: Grechyna, Daryna
    Abstract: Financial intermediation facilitates economic development by providing entrepreneurs with external finance. The relative costs of financing depend on the relative efficiency of the financial sector and the sector using financial intermediation services, the real sector. These costs determine the occupational choices and the set of active firms in the financial and real sectors. A model of firm-size distributions in the financial and real sectors results. This model is calibrated to match facts about the U.S. economy, such as the interest-rate spread and the establishment-size distributions in the financial and real sectors. It is then used to evaluate the importance of the relative technological progress in the financial and real sectors for the dynamics of the average establishment size in the financial sector. The model accounts for 58\% of the reduction in the average establishment size in the U.S. financial sector over 1986-2006 and for a 4.5 persons per establishment decline in the average size of the financial sector establishment in Taiwan over 1971-2011.
    Keywords: economic development; financial development; technological progress; firm-size distributions; interest-rate spreads.
    JEL: E13 O11 O16 O41
    Date: 2017–12–07
  4. By: Keuschnigg, Christian; Kogler, Michael
    Abstract: Capital reallocation from unprofitable to profitable firms is a key source of productivity gain in an innovative economy. We present a model of credit reallocation and focus on the role of banks: Weakly capitalized banks hesitate to write off non-performing loans to avoid a violation of regulatory requirements or even insolvency. Such behavior blocks credit reallocation to expanding industries and results in a distorted investment process and low aggregate productivity. Reducing the cost of bank equity, tightening capital requirements, and improving insolvency laws relaxes constraints and mitigates distortions.
    Keywords: Banking; credit reallocation; finance and growth; regulations
    JEL: D92 G21 G28 G33
    Date: 2017–11
  5. By: Cyn-Young Park (Asian Development Bank); Rogelio Mercado Jr. (South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: This paper introduces a new index of financial inclusion for 151 economies using principal component analysis to compute weights for aggregating 9 indicators of access, availability, and usage. It then assesses the impact of financial inclusion on poverty and income inequality. The results provide evidence that high and middle-high-income economies with high financial inclusion have significantly lower poverty, while no such relation exists for middle-low and low-income economies. The nonlinearities in the cross-country determinants and impacts of financial inclusion on poverty and income inequality across income groups are important to choosing the appropriate policies for achieving inclusive growth in different development stages.
    Keywords: financial inclusion, poverty, income inequality
    JEL: G18 O11 O16
    Date: 2018–01
  6. By: Claessens, Stijn; Kose, Ayhan
    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, emphasizes 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: macro-financial linkages; real-financial linkages; financial accelerator
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–11
  7. By: Claessens, Stijn; Kose, Ayhan
    Abstract: This paper surveys the literature on the linkages between asset prices and macroeconomic outcomes. It focuses on three major questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these linkages? And third, what are the main challenges to the theoretical and empirical findings? The survey addresses these questions in the context of four major asset price categories: equity prices, house prices, exchange rates and interest rates, with a particular focus on their international dimensions. It also puts into perspective the evolution of the literature on the determinants of asset prices and their linkages with macroeconomic outcomes, and discusses possible future research directions.
    Keywords: asset prices; equity prices; frictions; imperfections; macro-financial linkages; real-financial linkages
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–11

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