nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒09‒10
ten papers chosen by
Georg Man

  1. Financing Ventures By Jeremy Greenwood; Juan Sanchez; Pengfei Han
  2. Revisiting financial liberalisation and economic growth: A review of international literature By Akinsola, Folusu A.; Odhiambo, Nicholas M.
  3. Asset Price Bubbles and the Distribution of Firms By Haozhou Tang
  4. The quest for pro-poor and inclusive growth: The role of governance By Djeneba Doumbia
  5. The Long-term Debt Accelerator By Joachim Jungherr; Immo Schott
  6. Fiscal Rules in a Monetary Economy: Implications for Growth and Welfare By Tetsuo Ono
  7. Macroeconomic implications of shadow banks: A DSGE analysis By Bora Durdu; Molin Zhong
  8. Inequality and finance in a rent economy By Botta, Alberto; Caverzasi, Eugenio; Russo, Alberto; Gallegati, Mauro; Stiglitz, Joseph E.
  9. Measuring Real-Financial Connectedness in the U.S. Economy By Erhan Uluceviz; Kamil Yilmaz
  10. The Incentive Channel of Capital Market Interventions By Michael Lee; Daniel Neuhann

  1. By: Jeremy Greenwood (University of Pennsylvania); Juan Sanchez (Federal Reserve Bank of St. Louis); Pengfei Han (University of Pennsylvania)
    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 fi nancing, 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.
    Date: 2018
  2. By: Akinsola, Folusu A.; Odhiambo, Nicholas M.
    Abstract: In this paper, we review the existing literature on the relationship between financial liberalization and economic growth, highlighting both the theoretical framework and empirical evidence. Our review is different from other reviews; since it critically evaluates the impact of financial liberalization on economic growth regarding its strength, weakness and policy implications. Unlike other previous reviews that tend to focus mainly on the impact of interest-rate liberalization on economic growth, our study incorporates other forms of financial liberalization, such as stock market liberalization and exchange rate liberalization. Based on the literature reviewed in this paper, we have found that the relationship between financial liberalization and economic growth is inconclusive ??? with some studies showing a positive effect of liberalization policies; while other studies have shown the negative effect of financial liberalization. Whether financial liberalization contributes to more economic growth, as postulated by its proponents, therefore, remains an empirical issue. We also found the efficacy of financial liberalization to be dependent on the proxy used to measure the level of financial liberalization, the country of study, and the methodology used. In addition, we have found that countries that observed the preconditions for financial liberalization ended up with a positive outcome; while countries that hurriedly liberalized their financial sectors had a negative outcome. We, therefore, recommend that full financial liberalization should not be implemented ??? without a concomitant strong prudential regulation, a stable macroeconomic policy and an impregnable institution in place.
    Keywords: Financial Liberalisation, Economic Growth, Capital Market Liberalisation, Capital Account Liberalisation
    Date: 2018–08–24
  3. By: Haozhou Tang (Bank of Mexico)
    Abstract: This paper studies the macroeconomic effects of asset bubbles from the perspective of firms. I introduce bubbles into a model with firm heterogeneity and firm entry and exit: in a bubbly equilibrium, the price of a firm contains a fundamental component, which represents the net present value of profits, and a bubble component. I show that bubbles act as subsidies to new firms and have the following implications: i) bubbles lower the average productivity and profitability of new firms; ii) bubbles increase the number of firms, wages, and aggregate output; iii) along transition dynamics, bubbles subsidize new firms rather than incumbents, aggravating misallocation and therefore depressing aggregate productivity. The model can be used to discriminate the alternative explanations of business cycles, like shocks to productivity, and shocks to financial frictions. Firm-level evidence suggests that the Spanish economic expansion before the global financial crisis can be well interpreted as a consequence of a bubble boom, and the recession as an outcome of a bubble crash.
    Date: 2018
  4. By: Djeneba Doumbia (World Bank and Paris School of Economics)
    Abstract: This paper analyzes the role of good governance in fostering pro-poor and inclusive growth. Using a sample of 112 countries over the period 1975-2012, the main results show that growth is in general pro-poor. However, growth has not been inclusive – as illustrated by a decline in the bottom quintile share of the income distribution. While all features of good governance support income growth and reduce poverty, only government effectiveness and the rule of law are found to enhance inclusive growth. Investigating the determinants of pro-poor and inclusive growth highlights that education strategies, infrastructure improvement and financial development are the key factors for poverty reduction and inclusive growth. Relying on the Panel Smooth Transition Regression (PSTR) model following Gonzalez et al. (2005), the paper identifies a nonlinear relationship between governance and pro-poor growth while the impact of governance on inclusive growth appears to be linear.
    Keywords: pro-poor growth, inclusive growth, governance, PSTR.
    JEL: C23 G28 H5 O11 O15 O57
    Date: 2018–02
  5. By: Joachim Jungherr (IAE (CSIC), MOVE, and Barcelona GSE); Immo Schott (Université de Montréal)
    Abstract: We introduce risky long-term debt to a standard model of firm financing and investment. This allows us to identify a novel amplification mechanism: the Long-term Debt Accelerator. A negative shock triggers an adverse feedback loop between low investment and high credit spreads. Relative to a frictionless RBC setup, the Long-term Debt Accelerator amplifies shocks by about 160%. This amplification mechanism is absent from standard models including only short-term debt. Negative shocks are more severe than positive shocks of equal size and amplification is stronger for larger shocks. If fundamental volatility is lower and firms accumulate more debt, recessions become more severe. The Long-term Debt Accelerator is in line with the empirically observed cyclical behavior of credit spreads, leverage, and debt maturity.
    Date: 2018
  6. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study considers two fiscal rules, a debt rule that controls the debt-to- GDP ratio, and an expenditure rule that controls the expenditure-to-GDP ratio, in a monetary growth model with financial intermediation. Tightening fiscal rules promotes economic growth and thus benefits future generations. However, there could be two equilibria of the nominal interest rates, and the welfare effects of the rules on the current generation are different between the two equilibria. In particular, the effects of a decreased debt-to-GDP ratio depend on its initial ratio; a low (high) ratio country has an incentive (no incentive) to reduce the ratio further from the viewpoint of the current generation's welfare. This result offers a reason for difficulties with fiscal reform in countries with already high debt-to-GDP ratios.
    Keywords: Fiscal Rule; Government Debt; Economic Growth
    JEL: E62 E63 H63 O42
    Date: 2017–08
  7. By: Bora Durdu (Federal Reserve Board); Molin Zhong (Federal Reserve Board)
    Abstract: Shadow banks have played an increasing role in the intermediation of credit as well as transmission of shocks to the rest of the economy over the last two decades. We examine the implications of these banks using a medium-scale DSGE model in which shadow banks differ from commercial banks in two aspects. First, shadow banks do not face capital requirements. Second, these banks do not receive deposit insurance from the government. Using the model, we highlight that shadow banks can mitigate the effects of an increase in capital requirements. A one percentage point increase in capital requirements leads to an annualized decline from 0.75% to around 0.05% in commercial bank default rates in the longer run. These declines in default rates are achieved with modest declines in economic activity; the change in capital requirement leads to a short-run decline in GDP of 0.6%, a long-run decline of 0.2%, and a total lending decline of 0.9%.
    Date: 2018
  8. By: Botta, Alberto; Caverzasi, Eugenio; Russo, Alberto; Gallegati, Mauro; Stiglitz, Joseph E.
    Abstract: The present paper aims at offering a contribution to the understanding of the interactions between finance and inequality. We investigate the ways through which income and wealth inequality may have influenced the development of modern financial systems in advanced economies, the US economy first and foremost, and how modern financial systems have then fed back on income and wealth distribution. We focus in particular on securitization and on the production of complex structured financial products. We analyse this topic by elaborating a simulated hybrid Agent-Based Stock-Flow-Consistent (AB-SFC) macroeconomic model, encompassing heterogeneous (i.e. households) and aggregate sectors. Our findings suggest that the increase in economic growth, favoured by the higher level of credit supply coming with securitization, may determine a more unequal and financially unstable economic system.
    Keywords: Inequality; securitization; rent economy; financial crisis; AB model; SFC approach
    Date: 2018–06–01
  9. By: Erhan Uluceviz (Gebze Technical University); Kamil Yilmaz (Koç University)
    Abstract: We analyze connectedness between the real and financial sectors of the U.S. economy. Using the weekly ADS index of the Philadelphia FED (the widely used business conditions indicator) to represent the real side, we find that during times of financial distress and/or business cycle turning points the direction of connectedness runs from the real sector to financial markets. The ADS index is derived from a model containing a measure of term structure along with real variables, therefore, it might not be the best representative of the real activity to be used in the connectedness analysis. As an alternative, we derive a real activity index (RAI) from a dynamic factor model of the real sector variables only. The behavior of RAI over time is quite similar to that of the ADS index. When we include RAI to represent the real side of the economy in the connectedness analysis, the direction of net connectedness reverses: financial markets generate positive net connectedness to the real side of the economy.
    Keywords: Macro-financial linkages, Connectedness, ADS index, Dynamic factor model, Volatility, Vector autoregression, Variance decomposition.
    JEL: C38 E44 E37 G10
    Date: 2018–09
  10. By: Michael Lee (Federal Reserve Bank of New York); Daniel Neuhann (UT Austin, McCombs School of Business)
    Abstract: We develop a tractable dynamic model of collateralized lending in which the degree of adverse selection evolves endogenously due to moral hazard. We use this model to study how government interventions designed to boost liquidity in frozen markets af- fect private incentives to maintain high-quality assets. We show that small interventions can lead to “intervention traps” – expectations concerning future interventions destroy private incentives to improve the quality of collateral, which stunts recovery and war- rants continued market intervention – even when they restore market liquidity. Bigger interventions may lead to faster recoveries, and it may be efficient to continue to inter- vene even after market liquidity is restored. This runs counter to previous findings in static environments where it is optimal to keep interventions as small as possible, and to intervene only when markets are illiquid.
    Date: 2018

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