nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒02‒19
six papers chosen by
Georg Man

  1. Financing Ventures By Jeremy Greenwood; Pengfei Han; Juan M Sanchez
  2. Obstacles to productivity in Asia and Pacific region: finance reigns By Filipe Lage de Sousa
  3. Is the financial cycle a leading indicator of real output during expansions and contractions? A quantile analysis for Greece By Costas Karfakis; Eftychia Karfaki
  4. Alternative finance and credit sector reforms: the case of China By Noëmi, Lisack
  5. Sovereign Risk and Bank Risk-Taking By Anil Ari
  6. Financial Development and Pre-historic Geographical Isolation: Global Evidence By Kodila-Tedika, Oasis; Asongu, Simplice; Cinyabuguma, Matthias; Tchamyou, Vanessa

  1. By: Jeremy Greenwood (University of Pennsylvania); Pengfei Han (University of Pennsylvania); Juan M Sanchez (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., 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.
    Keywords: capital gains taxation, dynamic contract, endogenous growth, evaluating, funding rounds, growth regressions, IPO, monitoring, startups, research and development, venture capital
    Date: 2018–02
  2. By: Filipe Lage de Sousa (Fluminense Federal University - Brazil)
    Abstract: Firms face difference obstacles for their development. This paper investigates which obstacle is the largest to firms’ productivity using micro-level data for the Asia and Pacific region. Access to finance shows the most robust result in our investigation, being stronger for SMEs. Removing SMEs’ credit constraints seem to be a powerful tool to promote economic growth in the region, particularly in the manufacturing sector.
  3. By: Costas Karfakis (Department of Economics, University of Macedonia); Eftychia Karfaki (Department of Economics, University of Macedonia)
    Abstract: This paper examines the relationship between the financial cycle and real output in Greece. The quantile analysis indicates that the financial cycle is a leading indicator of real output in the upper and lower tails of its conditional distribution, given the presence of other explanatory variables. In addition, in the lower quantile, the real output is driven by changes in perceptions about the performance of the Greek economy. Thus, a rise in the financial cycle along with positive expectations of the private sector about the future prospects of the real economy seems to represent the main driving forces of the Greek economy out of the current depression.
    Keywords: Financial cycle, real output, quantile analysis, Granger causality test.
    JEL: C22 E32 E51 E52 F41
    Date: 2018–02
  4. By: Noëmi, Lisack (Bank of England)
    Abstract: This paper studies the impact of credit sector reforms in a general equilibrium framework where heterogeneous firms choose their optimal investment and how to finance it. Besides retained earnings and bank loans, I focus on the crucial role played by alternative sources of funding, including family, friends, non-listed equity and informal banking institutions. While small young enterprises face important difficulties to finance their investment, these alternative financing sources allow them to partially bypass credit constraints. The model can account for the financing patterns observed in Chinese data. Despite an increase in non-performing loans by 11%, liberalizing the banking sector increases the steady-state aggregate level of capital by 10% and the steady-state aggregate production by 5%, inducing efficiency gains and a welfare increase of 1.8%. Selectively tightening the regulation of the alternative finance sector, if simultaneous to bank liberalization, may prevent the rise in non-performing loans while preserving most welfare improvements. This remains however detrimental to the development of small, young enterprises and limits efficiency gains.
    Keywords: Informal finance; banking reform; heterogeneous agents; credit constraints; China
    JEL: E22 O16 O17
    Date: 2017–11–17
  5. By: Anil Ari
    Abstract: I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in defaultrisky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
    Keywords: Financial crises;Banking crises;Risk-taking, Financial constraints, Sovereign debt crises, Financial Markets and the Macroeconomy, General, International Lending and Debt Problems, Government Policy and Regulation
    Date: 2017–12–14
  6. By: Kodila-Tedika, Oasis; Asongu, Simplice; Cinyabuguma, Matthias; Tchamyou, Vanessa
    Abstract: Using cross-country differences in the degree of isolation before the advent of technologies in sea and air transportation, we assess the relationship between geographic isolation and financial development across the globe. We find that pre-historic geographical isolation has been beneficial to development because it has contributed to contemporary cross-country differences in financial intermediary development. The relationship is robust to alternative samples, different estimation techniques, outliers and varying conditioning information sets. The established positive relationship between geographic isolation and financial intermediary development does not significantly extend to stock market development.
    Keywords: Financial development; Isolation; Agglomeration; Globalization
    JEL: F15 G15 N70 O16 O50
    Date: 2017–01–02

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