nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒08‒27
eight papers chosen by
Georg Man

  1. Dispersion in Financing Costs and Development By Tiago Cavalcanti; Bruno Martins; Cezar Santos; Joseph Kaboski
  2. Stock Price Fluctuations and Productivity Growth By Diego Comin; Ana Maria Santacreu; Mark Gertler; Phuong Ngo
  4. Fiscal buffers, private debt and recession: the good, the bad and the ugly By Nicoletta Batini; Giovanni Melina; Stefania Villa
  5. Lending relationships and the real economy: evidence in the context of the euro area sovereign debt crisis By Luciana Barbosa
  6. How Important are Indivisible Investments for Development? Experimental Evidence from Uganda By Joseph Kaboski; Molly Lipscomb; Virgiliu Midrigan
  7. Financial Frictions, Trade, and Misallocation By David Kohn; Fernando Leibovici; Michal Szkup
  8. Macro-Financial Linkages in Shallow Markets; Experience from the African Department’s Pilot Countries By International Monetary Fund

  1. By: Tiago Cavalcanti (University of Cambridge); Bruno Martins (Banco Central do Brasil); Cezar Santos (Fundacao Getulio Vargas); Joseph Kaboski (University of Notre Dame)
    Abstract: We study how dispersion in financing costs and financial contract enforcement affect entrepreneurship, firm dynamics and economic development in an economy in which financial contracts are imperfectly enforced. We use employee-employer administrative linked data combined with data on financial transactions of all formal firms in Brazil to show how interest rate spreads vary with firm size, age and loan characteristics, such as loan size and loan maturity. We present a model of economic development based on a modified version of Buera, Kaboski, and Shin (2011) which are consistent with those facts and provide evidence on the effects of financial reforms on economic development. Eliminating dispersion in financing costs leads to more credit and higher output due to cheaper credit for productive agents with low assets. Moreover, abstracting from heterogeneity in interest rate spreads understates the impacts of financial reforms that improve the enforcement of credit contracts.
    Date: 2018
  2. By: Diego Comin (Dartmouth College); Ana Maria Santacreu (Federal Reserve Bank of Saint Louis and); Mark Gertler (New York University); Phuong Ngo (Cleveland State University)
    Abstract: This paper studies the relationship between stock prices and fluctuations in TFP. We document a strong predictability of lagged stock price growth on future TFP growth at medium horizons. To explore the sources of this co-movement, we develop a one-sector real business model augmented to allow for (i) endogenous technology through R&D and adoption, and (ii) exogenous shocks to the risk premium. Model simulations produce predictability patterns quantitatively similar to the data. A version of the model with exogenous technology produces no predictability of TFP growth. Decomposing historical TFP, we show that the predictability uncovered in the data is fully driven by the endogenous component of TFP. This finding suggests that fluctuations in risk premia impact TFP growth through their effect on the speed of technology diffusion instead of responding to exogenous fluctuations in future TFP.
    Date: 2018
  3. By: Nadav Ben Zeev (BGU)
    Keywords: Credit Supply Shocks, Total Factor Productivity, Input misallocation
    JEL: E23 E32 E44
    Date: 2018
  4. By: Nicoletta Batini (International Monetary Fund (IMF)); Giovanni Melina (International Monetary Fund (IMF)); Stefania Villa (Bank of Italy)
    Abstract: Focusing on Euro-Area countries, we show empirically that higher private debt leads to deeper recessions while higher public debt does not, unless its level is especially high. We then build a general equilibrium model that replicates these dynamics and use it to design a policy that can mitigate the recessionary consequences of private deleveraging. In the model, in the aftermath of financial shocks, recessions are milder and public debt is more contained when the government lends directly to those households and firms that face binding borrowing constraints. As a consequence, large fiscal buffers are critical to enhance macroeconomic resilience to financial shocks.
    Keywords: private debt, public debt, financial crisis, financial shocks, borrowing constraints, fiscal limits
    JEL: E44 E62 H63
    Date: 2018–07
  5. By: Luciana Barbosa
    Abstract: The recent euro area sovereign debt crisis put the financial sector under pressure and imposed several challenges, mainly in the countries most affected by the crisis. The sovereign-bank linkage can negatively affect the economic activity, especially by bank-dependent firms. This study explores the heterogeneity across banks in their funding structure, sovereign exposures, solvency, and availability of collateral, with the aim of investigating the effect of the crisis on firms' investment and employment decisions. Exploring a detailed database that covers virtually all bank loans granted to Portuguese firms, for the period 2007-2012, the results suggest an impact on investment and employment paths for firms whose lenders depend more heavily on interbank and market funding. Moreover, the results also stress the importance of assets eligible as collateral in monetary operations conducted by Central Bank. The findings suggest how a deterioration in sovereign creditworthiness can affect the real economy via the banking sector.
    JEL: E22 E24 E44 E51 G21 G31
    Date: 2017
  6. By: Joseph Kaboski (University of Notre Dame); Molly Lipscomb (University of Virginia); Virgiliu Midrigan (New York University)
    Abstract: In theory, high yield, indivisible investments investment indivisibilities and the nonconvexities in production can play crucial roles in development, especially when financial frictions are present. When facing such investments, agents can be more risk-loving and impatient. This paper uses a cash grant experiment in rural and semi-urban Uganda to evaluate how quantitatively important these investment indivisibilities may be. Specifically, we offer households a choice between a safer, low payoff and a riskier, large payoff lotteries. We also offer them a chance between an safer payoff or riskier, larger payoff. We also offer them an opportunity to delay receipt, earning interest. Consistent with the presence of high yield, indivisible investments, we find significant rates of risk-loving demand (27 percent) and impatient demand (71 percent), and this demand is linked to savings and returns. Higher payoffs are associated with increased savings, especially if the payoffs are sufficient to enable indivisible investments. We calibrate a model with financial frictions and high yield, indivisible investments to the empirical results, and evaluate their importance for aggregate development and the impacts of financial frictions.
    Date: 2018
  7. By: David Kohn (Pontificia Universidad Católica de Chile); Fernando Leibovici (Federal Reserve Bank of St. Louis); Michal Szkup (University of British Columbia)
    Abstract: We investigate the extent to which financial frictions shape the effects a trade liberalization has on aggregate total factor productivity (TFP) and capital misallocation. We study a small open economy populated with heterogeneous entrepreneurs who differ in their productivity and are subject to financing constraints. Individuals choose whether to be workers or entrepreneurs, and entrepreneurs choose whether to export or not. We show how financial frictions distort these decisions and aggregate TFP. We calibrate the model to match key features of Chilean plant-level data and use it to quantify TFP losses due to misallocation. We then investigate how the presence of financial constraints affects the output and TFP gains from a trade liberalization. We find that lowering trade barriers has a stronger positive effect in less financially developed economies. The higher profits that result from a trade liberalization allow firms to accumulate assets and relax their credit constraint, which is particularly valuable in economies where firms are severely constrained.
    Date: 2018
  8. By: International Monetary Fund
    Abstract: This paper assesses and disseminates experiences and lessons from low-income countries (LICs) in Sub-Saharan Africa that were selected by the Africa Department in 2015-16 as pilots for enhanced analysis of macro-financial linkages in Article IV staff reports. The paper focuses on the common characteristics across the pilot countries and highlights the tools used in the analysis, the challenges encountered, and the solutions deployed in overcoming them.
    Keywords: Financial risk;Financial inclusion;Financial markets;Low income countries;Sub-Saharan Africa;Shallow Financial Markets; Risk; Financial Inclusion
    Date: 2018–07–23

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