nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒09‒17
eight papers chosen by
Georg Man

  1. Devaluations and Growth: The Role of Financial Development By David Perez-Reyna; Filippo Rebessi
  2. The Term Structure of Growth-at-Risk By Tobias Adrian; Federico Grinberg; Nellie Liang; Sheheryar Malik
  3. Credit subsidies: bad idea or misuse? By Merlin, Giovanni Tondin
  4. When Losses Turn into Loans: The Cost of Undercapitalized Banks By Blattner, Laura; Farinha, Luisa; Rebelo, Francisco
  5. Reserve Accumulation, Foreign Direct Investment, and Economic Growth By Hidehiko Matsumoto
  6. The Paradox of Global Thrift By Luca Fornaro
  7. A Macroeconomic Model with Financial Panics By Mark Gertler; Andrea Prestipino; Nobuhiro Kiyotaki
  8. The Decline in Corporate Investment By Vito Gala; Hongxun Ruan; Joao Gomes

  1. By: David Perez-Reyna (Universidad de los Andes); Filippo Rebessi (California State University, East Bay)
    Abstract: In this paper we rationalize the observation that in emerging markets an exchange rate devaluation might have a negative effect on production, due to the fact that the increase in the value of liabilities denominated in foreign currency causes a tightening in the domestic financial conditions, potentially offsetting the effect of an increase in the value of exports. We build on \cite{Melitz2003} to propose a model with heterogeneous firms in a small open economy where firms face financial frictions when borrowing from abroad. Depending on how strong the friction is, a foreign shock that results in an exchange rate devaluation might translate into lower output, even if exports increase.
    Date: 2018
  2. By: Tobias Adrian; Federico Grinberg; Nellie Liang; Sheheryar Malik
    Abstract: Using panel quantile regressions for 11 advanced and 10 emerging market economies, we show that the conditional distribution of GDP growth depends on financial conditions, with growth-at-risk (GaR)—defined as growth at the lower 5th percentile—more responsive than the median or upper percentiles. In addition, the term structure of GaR features an intertemporal tradeoff: GaR is higher in the short run; but lower in the medium run when initial financial conditions are loose relative to typical levels, and the tradeoff is amplified by a credit boom. This shift in the growth distribution generally is not incorporated when solving dynamic stochastic general equilibrium models with macrofinancial linkages, which suggests downside risks to GDP growth are systematically underestimated.
    Keywords: Financial stability;downside risk, macrofinancial linkages, volatility paradox, quantile regression, General, International Business Cycles
    Date: 2018–08–02
  3. By: Merlin, Giovanni Tondin
    Abstract: Using a heterogeneous agent model with incomplete markets and entrepreneurship, I show that development banks can generate significant and positive impacts in an economy if they target the infrastructure sector and are funded through low distortionary taxes. Calibrating the model for the Brazilian economy, I assess that a better credit policy by the Brazilian Development Bank (BNDES) can generate a welfare gain around 10%. However, with the current format, the subsidy policies in Brazil are, at best, useless to foster development, besides transferring welfare from the poor to the rich.
    Date: 2018–08
  4. By: Blattner, Laura (Stanford University); Farinha, Luisa (Bank of Portugal); Rebelo, Francisco (Boston College)
    Abstract: We provide evidence that a weak banking sector contributed to low productivity following the European debt crisis. An unexpected increase in capital requirements provides a natural experiment to study the effects of reduced capital adequacy on productivity. Affected banks respond by cutting lending but also by reallocating credit to distressed firms with underreported loan losses. We develop a method to detect underreported losses using loan-level data. We show that the credit reallocation leads to a reallocation of production factors across firms. We find that the resulting factor misallocation accounts for 20% of the decline in productivity in Portugal in 2012.
    JEL: D24 E44 E51 G21 G28 O47
    Date: 2018–06
  5. By: Hidehiko Matsumoto (University of Maryland)
    Abstract: This paper develops a quantitative small-open-economy model to assess the optimal pace of foreign reserve accumulation by developing countries. The model features endogenous growth with foreign direct investment (FDI) entry and sudden stops of capital inflows to incorporate benefits of reserve accumulation. Reserve accumulation depreciates the real exchange rate and attracts FDI, which endogenously promotes productivity growth. When a sudden stop happens, the government uses accumulated reserves to prevent a severe economic downturn. The calibrated model shows that two factors are the key determinants of the optimal pace of reserve accumulation: the elasticity of the foreign borrowing spread with respect to debt, and the entry cost for FDI. The model suggests that these two factors can explain a substantial amount of the cross-country variation in the observed pace of reserve accumulation.
    Date: 2018
  6. By: Luca Fornaro (CREI and Universitat Pompeu Fabra)
    Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is frequently constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies, aiming at increasing national savings in good times to sustain aggregate demand and employment during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. The reason is that prudential policies by booming countries generate a rise in the global supply of savings or, equivalently, a fall in global aggregate demand. In turn, weaker global aggregate demand exacerbates the recession in countries currently stuck in a liquidity trap. Therefore, paradoxically, the world might very well experience a fall in employment and output following the implementation of prudential policies.
    Date: 2018
  7. By: Mark Gertler (New York University); Andrea Prestipino (Federal Reserve Board); Nobuhiro Kiyotaki (Princeton University)
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    Date: 2018
  8. By: Vito Gala (University of Pennsylvania); Hongxun Ruan (Wharton School); Joao Gomes (University of Pennsylvania)
    Abstract: We use a dynamic stochastic model of firm investment to investigate quantitatively the causes behind the ongoing decline in corporate investment. Our analysis focuses on three of the most commonly proposed explanations: (i) a secular decline in productivity growth; (ii) a tightening of financial constraints in the period surrounding the Great Depression; and (iii) the recent increase in policy uncertainty. We find that all three factors are important to account for the sharp decline in investment during the Great Recession. However only slow productivity growth can best account for the long term decline in investment.
    Date: 2018

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