nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒03‒05
seven papers chosen by
Georg Man

  1. Chained financial frictions and credit cycles By Federico Lubello; Ivan Petrella; Emiliano Santoro
  2. Mobile banking usage, quality of growth, inequality and poverty in developing countries By Asongu, Simplice; Odhiambo, Nicholas
  3. Saving, investment, capital stock and current account projections in long-term scenarios By Yvan Guillemette; Andrea De Mauro; David Turner
  4. Credit constraints, firms investment and growth evidence from survey data By Miguel García-Posada Gómez
  5. Short- and Long-term Impact of Trade Openness on Financial Development in Sub-Saharan Africa By Ho, Sin-Yu; Njindan Iyke, Bernard
  6. India; Financial System Stability Assessment-Press Release and Statement by the Executive Director for India By International Monetary Fund
  7. Economic Convergence in the Euro Area: Coming Together or Drifting Apart? By Jeffrey R. Franks; Bergljot B Barkbu; Rodolphe Blavy; William Oman; Hanni Schoelermann

  1. By: Federico Lubello; Ivan Petrella; Emiliano Santoro
    Abstract: We examine the role of bank collateral in shaping credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers' assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating nancial assets (i.e., bank loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers' financial assets beyond that of other assets that are not involved in more than one layer of financial contracting. In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies a la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification of shocks and the degree of procyclicality of bank leverage. A regulator may reduce macroeconomic volatility through the introduction of a countercyclical capital buffer, while a fixed capital adequacy requirement displays limited stabilization power.
    Keywords: Banking; Bank Collateral; Liquidity; Capital Misallocation; Macroprudential Policy.
    JEL: E32 E44 G21 G28
    Date: 2018–02
  2. By: Asongu, Simplice; Odhiambo, Nicholas
    Abstract: The transition from Millennium Development Goals to Sustainable Development Goals has substantially shifted the policy debate from development to inclusive development. Using interactive quantile regressions, we examine the correlations between mobile banking and inclusive development (quality of growth, inequality and poverty) among individuals in 93 developing countries for the year 2011. Mobile banking entails: ‘mobile used to pay bills’ and ‘mobile used to receive/send money’. The findings broadly show that increasing mobile banking dynamics to certain thresholds would increase (decrease) quality of growth (inequality) in quantiles at the high-end of inclusive development distributions for the most part. The study is original in that it explores the relationship between mobile banking and inclusive development using three measurements of inclusive development, namely: quality of growth, inequality and poverty. As a main policy implication, encouraging mobile banking applications would play a substantial role in responding to the challenges of immiserizing growth, inequality and poverty in developing countries.
    Keywords: Mobile banking; Quality of growth; Poverty; Inequality; Developing countries
    JEL: G20 I10 I20 I32 O40
    Date: 2017–01
  3. By: Yvan Guillemette; Andrea De Mauro; David Turner
    Abstract: The paper describes the framework used in long-term economic scenarios for the projection of the saving rate, investment, capital stock and current account. The saving rate is determined according to an estimated equation which suggests that demographics, captured by the old-age dependency rate and life expectancy, is a major driver, with additional effects from the fiscal balance, labour productivity growth, the net oil trade balance, the availability of credit and the level of social protection. The evolution of the business sector capital stock depends on the economy’s cyclical position, product market regulation, employment protection legislation and the user cost of capital, and may be constrained by current account deficits depending on the degree of capital account openness. Business sector investment is derived from the capital stock projection via the usual stock-flow identity. The public sector capital stock-to-output ratio is assumed to be constant in the baseline scenario, but a public investment shock can be simulated in alternative scenarios. The current account balance is obtained as the difference between national investment and saving, and in turn determines the evolution of the net international investment position. A global interest rate premium helps to bring global saving and investment into balance.
    Keywords: capital stock, current account, investment, long-term model, long-term scenarios, projection, Saving rate
    JEL: E21 E22 E27 F37
    Date: 2018–02–23
  4. By: Miguel García-Posada Gómez (European Central Bank and Banco de España)
    Abstract: We assess the impact of credit constraints on investment, inventories and other working capital and firm growth with a large panel of small and medium-sized enterprises from 12 European countries for the period 2014-2016. The data come from the Survey on the access to finance of enterprises (SAFE), a survey that is especially designed to analyse the problems in the access to external finance of European SMEs. The key identification challenge is a potential reverse-causality bias, as firms with poor investment and growth opportunities may have a higher probability of being credit constrained. We implement several strategies to overcome this obstacle: proxies for investment opportunities, lagged regressors, random effects and instrumental variables. Our findings suggest that credit constraints, both in bank financing and other financing (e.g. trade credit), have strong negative effects on investment in fixed assets, while the impact on firm growth and working capital is less robust.
    Keywords: investment, firm growth, working capital, ordered probit, instrumental variables
    JEL: G30 G31 G32
    Date: 2018–02
  5. By: Ho, Sin-Yu; Njindan Iyke, Bernard
    Abstract: We extend a recently proposed index of trade openness to a panel data setting in order to investigate the short- and long-term impact of trade openness on financial development for a panel of 43 Sub-Saharan African (SSA) countries over the period 1996–2014. We found trade openness to enhance financial development in the long term. In the short term, the effect of openness is not clear but points to a negative one. When we divided the sample into low- and middle-income groups, we found that openness enhances financial development in the former group but hurts it in the latter group. This suggests a nonlinear relationship between financial development and openness. Among other factors that may be relevant in explaining the trade openness-financial development nexus, we examined the role of governance, human capital development, and infrastructural development. We found that governance, human capital and infrastructure development are critical to financial development, particularly in the long-term. Our findings have relevant policy implications, which we elaborate.
    Keywords: Financial Development; Trade Openness; Short- and Long-run Impact; SSA.
    JEL: F13 G21
    Date: 2018–01
  6. By: International Monetary Fund
    Abstract: Against the backdrop of important structural reforms and terms of trade gains, India recorded strong growth in recent years in both economic activity and financial assets. Increased diversification, commercial orientation, and technology-driven inclusion have supported growth in the financial industry, backed by improved legal, regulatory, and supervisory frameworks. Yet, the financial sector is grappling with significant challenges, and growth has recently slowed. High nonperforming assets (NPAs) and slow deleveraging and repair of corporate balance sheets are testing the resilience of the banking system and holding back investment and growth.
    Keywords: Middle East;Afghanistan, Islamic Republic of;
    Date: 2017–12–21
  7. By: Jeffrey R. Franks; Bergljot B Barkbu; Rodolphe Blavy; William Oman; Hanni Schoelermann
    Abstract: We examine economic convergence among euro area countries on multiple dimensions. While there was nominal convergence of inflation and interest rates, real convergence of per capita income levels has not occurred among the original euro area members since the advent of the common currency. Income convergence stagnated in the early years of the common currency and has reversed in the wake of the global economic crisis. New euro area members, in contrast, have seen real income convergence. Business cycles became more synchronized, but the amplitude of those cycles diverged. Financial cycles showed a similar pattern: sychronizing more over time, but with divergent amplitudes. Income convergence requires reforms boosting productivity growth in lagging countries, while cyclical and financial convergence can be enhanced by measures to improve national and euro area fiscal policies, together with steps to deepen the single market.
    Keywords: Business cycles;Economic integration;Euro Area;Financial cycles;Convergence, synchronization, Economic and Monetary Union, Optimum Currency Area, Financial Aspects of Economic Integration
    Date: 2018–01–23

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