nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒04‒02
five papers chosen by
Georg Man

  1. Finance, Talent Allocation, and Growth By Francesco D'Acunto; Laurent Frésard
  2. Recurrent Bubbles, Economic Fluctuations, and Growth By Pablo A. Guerron-Quintana; Tomohiro Hirano; Ryo Jinnai
  3. On the Direct and Indirect Real Effects of Credit Supply Shocks By Alfaro, Laura; García-Santana, Manuel; Moral-Benito, Enrique
  4. Financial Constraints and Poverty By Kodila-Tedika, Oasis; Ngunza Maniata, Kevin
  5. Reconciling the original Schumpeterian Model with the observed inverted-U relationship between competition and innovation By Roberto Bonfatti; Luis A. Bryce Campodonico; Luigi Pisano

  1. By: Francesco D'Acunto; Laurent Frésard
    Abstract: The growing finance wage premium is related to a modest net reallocation of skilled workers from non-finance sectors into finance in a broad sample of 24 countries over 35 years. The reallocation is higher when the finance wage premium grows faster than the contribution of the financial sector to the economy, which we proxy with the relative value added of finance. More innovative sectors and sectors exhibiting lower labor-transition costs face a higher reallocation of skilled workers. Yet, the growing finance wage premium is unrelated to sectoral or aggregate growth, to countries’ innovative capacity, to student enrollment in STEM degrees, and to the riskiness, efficiency, and competitiveness of banking sectors. Overall, the reallocation of skilled labor implied by a growing finance wage premium appears too modest to materially affect economic growth.
    Keywords: finance wage premium, skilled labor, misallocation, growth, innovation, banking sector.
    JEL: D72 G20 J23 J31 N20
    Date: 2018
  2. By: Pablo A. Guerron-Quintana (Boston College and Espol); Tomohiro Hirano (University of Tokyo); Ryo Jinnai (Hitotsubashi University)
    Abstract: We propose a model that generates permanent effects on economic growth following a recession (super hysteresis). Recurrent bubbles are introduced to an otherwise standard infinite-horizon business-cycle model with liquidity scarcity and endogenous productivity. In our setup, bubbles promote growth because they provide liquidity to constrained investors. Bubbles are sustained only when the financial system is under-developed. If the financial development is in an intermediate stage, recurrent bubbles can be harmful in the sense that they decrease the unconditional mean and increase the unconditional volatility of the growth rate relative to the fundamental equilibrium in the same economy. Through the lens of an estimated version of our model fitted to U.S. data, we argue that 1) there is evidence of recurrent bubbles; 2) the Great Moderation results from the collapse of the monetary bubble in the late 1970s; and 3) the burst of the housing bubble is partially responsible for the post-Great Recession dismal recovery of the U.S. economy.
    Date: 2018–03–12
  3. By: Alfaro, Laura; García-Santana, Manuel; Moral-Benito, Enrique
    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 on the universe of corporate loans for 2003-2013 to identify bank-specific shocks for each year using methods from the matched employer-employee literature. Combining 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 comparable or even 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 contractions.
    Keywords: Bank-Lending Channel; employment; input-output linkages.; investment; matched employer-employee; output
    Date: 2018–03
  4. By: Kodila-Tedika, Oasis; Ngunza Maniata, Kevin
    Abstract: This article revisits again relationship between financial sector and poverty, by testing the hypothesis according to which it is primarily financial constraints that affect poverty before the size of the financial sector. We find empirically proofs, which suggest that the differential of financial constraints is negatively linked at the level of poverty. This effect is robust in the control of deepening or financial development. Besides, it has an unstable sign. It persists even in the controls of other variables and economic technical changes. In conclusion, the countries with higher financial constraints are those where poverty is rife.
    Keywords: Financial development, Poverty, financial constraints
    JEL: G2 O15
    Date: 2018–02–27
  5. By: Roberto Bonfatti; Luis A. Bryce Campodonico; Luigi Pisano
    Abstract: Empirical studies have uncovered an inverted-U relationship between product-market competition and innovation. This is inconsistent with the original Schumpeterian Model, where greater competition reduces the profitability of innovation. We show that the model can predict the inverted-U if the innovators’ talent is heterogenous, and privately observable. With competition low and profitability high, talented innovators are credit constrained, since others are eager to mimic them. As competition increases, the mimickers become less eager, and talented innovators can invest more. This generates the increasing part of the relationship. With competition high, talented innovators are unconstrained, and the relationship is decreasing.
    Keywords: Innovation, Competition, Schumpeterian Model of Growth, Asymmetric Information
    Date: 2018

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