nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒05‒07
eight papers chosen by
Georg Man

  1. Financial Structure, Economic Growth and Development By Allen, Franklin; Gu, Xian; Kowalewski, Oskar
  2. How Does Foreign Direct Investment Affect Growth in Sub-Saharan Africa? New Evidence from Non-threshold and Threshold Analysis By Ibhagui, Oyakhilome
  3. Central Bank Independence and Inflation: Schumpeterian Theory and Evidence By Qichun He; Heng-fu Zou
  4. Going with the flows : New borrowing, debt service and the transmission of credit booms By Drehmann, Mathias; Juselius, Mikael; Korinek, Anton
  5. Interbank market turmoils and the macroeconomy By Paweł Kopiec
  7. Understanding Informal Financing By Allen, Franklin; Qian, Meijun; Xie, Jing
  8. Remittances and financial development in transition economies By Jakhongir Kakhkharov

  1. By: Allen, Franklin; Gu, Xian; Kowalewski, Oskar
    Abstract: Financial intermediaries and markets can alleviate market frictions through producing information and risk sharing in different ways. In practice, the structure of financial systems can be bank-based or market-based, varying across countries. The influence of financial structure on economic growth is dependent on the overall development of the real economy and institutions. The association is also different during crisis periods and non-crisis periods. Market-based systems tend to have an advantage for financially dependent industries in good times but are a disadvantage in bad times. The recent rapid growth of shadow banking benefits economic growth but also poses additional risks to the financial system and real economy.
    Keywords: banks; Economic Growth; markets; shadow banking
    Date: 2018–04
  2. By: Ibhagui, Oyakhilome
    Abstract: We draw on the threshold analysis to examine the effect of foreign direct investment on growth in Sub-Saharan Africa. The growth literature is awash with divergent evidence on the role of foreign direct investment (FDI) on economic growth. Although the FDI-growth nexus has been studied in diverse ways, very few studies have examined the problem within the framework of threshold regression analysis. Furthermore, even where this framework has been adopted, none of the previous studies has comprehensively examined the FDI-growth nexus in the broader Sub-Saharan Africa (SSA). In this paper, we revisit, within the standard panel and threshold regression framework, the problem of determining the growth impact of FDI. We use as thresholds six variables – inflation, initial income, population growth, trade openness, financial market development and human capital, and we base the analysis on a large panel-data set that comprises 45 SSA countries for the years 1985-2013. Our results show that the direct impact of FDI on growth is largely ambiguous and inconsistent. However, under the threshold analysis, we find evidence that FDI accelerates economic growth when SSA countries have achieved certain threshold levels of inflation, population growth and financial markets development. This evidence is largely invariant qualitatively and robust to different specifications. FDI enhances growth in SSA when inflation and private sector credit are below their threshold levels while population growth is above its threshold level.
    Keywords: Foreign Direct Investment (FDI), Economic Growth, and Threshold Analysis
    JEL: C4 E0
    Date: 2017
  3. By: Qichun He (Central University of Finance and Economics); Heng-fu Zou (Development Research Group, World Bank)
    Abstract: We first use a monetary Schumpeterian model to investigate how central bank independence (CBI) affects inflation. We find that we cannot predict a monotone relationship between CBI and infiation. When the elasticity of labor supply is high or the seigniorage is mainly used to finance entrepreneurs, a condition that is more likely in developed countries, CBI has a positive effect on inflation; in contrast, when labor supply is inelastic or the seigniorage is mainly used to finance non-productive government spending, a situation more commonly found in developing countries, CBI has a negative effect or no effect on inflation. Calibration shows the following. When the nominal interest rate increases from 8.3% (the sample mean) to the optimal value of 28.1%, the equilibrium rate of economic growth increases from the benchmark value of 1.8% to 1.99%, and the welfare gain is equivalent to a permanent increase in consumption of 1.02%. The growth and welfare effects increase with CBI. As an empirical test, we build panel data for 68 countries during 1998–2010 and find that the effect of CBI on inflation is positive and significant in developed countries, and it is insignificant (at the 5% level) in developing countries in both system generalized method of moments (GMM) and instrumental variable (IV) estimations. Our results remain robust to the consideration of financial crises, financial development, and other factors affecting inflation. Our empirical findings provide support for our theory.
    Keywords: Inflation, Central Bank Independence, Monetary Schumpeterian Model, Dynamic Panel Data
    JEL: E42 E58 O42
    Date: 2018–04
  4. By: Drehmann, Mathias; Juselius, Mikael; Korinek, Anton
    Abstract: Traditional economic models have had difficulty explaining the non-monotonic real effects of credit booms and, in particular, why they have predictable negative after-effects for up to a decade. We provide a systematic transmission mechanism by focusing on the flows of resources between borrowers and lenders, i.e. new borrowing and debt service. We construct the first cross-country dataset of these flows for a panel of house-hold debt in 16 countries. We show that new borrowing increases economic activity but generates a pre-specified path of debt service that reduces future economic activity. The protracted response in debt service derives from two key analytic properties of credit booms: (i) new borrowing is auto-correlated and (ii) debt contracts are long term. We confirm these properties in the data and show that debt service peaks on average four years after credit booms and is associated with significantly lower output and higher crisis risk. Our results explain the transmission mechanism through which credit booms and busts generate non-monotonic and long-lasting aggregate demand effects and are, hence, crucial for macroeconomic stabilization policy.
    JEL: E17 E44 G01 D14
    Date: 2018–04–24
  5. By: Paweł Kopiec (Narodowy Bank Polski)
    Abstract: This paper studies the macroeconomic consequences of interbank market disruptions caused by higher counterparty risk. I propose a novel, dynamic model of banking sector where banks trade liquidity in the frictional OTC market à la Afonso and Lagos (2015) that features counterparty risk. The model is then embedded into an otherwise standard New Keynesian framework to analyze the macroeconomic impact of interbank market turmoils: economy suffers from a prolonged slump and deflationary pressure during such episodes. I use the model to analyze the effectiveness of two policy measures: rise in the supply of central bank reserves and interbank market guarantees in mitigating the adverse effects of those disruptions.
    Keywords: Financial crisis, Interbank market, Policy intervention, OTC market
    JEL: D80 E44 E58 G21
    Date: 2018
    Date: 2018
  7. By: Allen, Franklin; Qian, Meijun; Xie, Jing
    Abstract: This paper offers a framework to understand informal financing based on mechanisms to deal with asymmetric information and enforcement. We find that constructive informal financing such as trade credits and family borrowing that relies on information advantages or an altruistic relationship is associated with good firm performance. Underground financing such as money lenders who use violence for enforcement is not. Constructive informal financing is prevalent in regions where access to bank loans is extensive, while its role in supporting firm growth decreases with bank loan availability. International comparisons show that China is not an outlier but rather average in using informal financing.
    Keywords: asymmetric information; Firm Growth; Informal financing; social collateral
    JEL: G21 G30 O16 O17
    Date: 2018–04
  8. By: Jakhongir Kakhkharov
    Keywords: Remittances, Financial System, Transition Economies
    JEL: F22 F24 G21 P51
    Date: 2018–03

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