nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒09‒24
eleven papers chosen by
Georg Man

  1. Determinants of Economic Growth in Hong Kong: The Role of Stock Market Development By Ho, Sin-Yu
  2. Relationship Between Financial Stability and Economic Growth in Turkey (2002-2017) By B. Tugberk Tosunoglu
  3. Oil Price Volatility, Financial Institutions and Economic Growth By Jarrett, U.; Mohaddes, K.; Mohtadi, H.
  4. Financial Stability, Growth, and Macroprudential Policy By Chang Ma
  5. Macroeconomic Effects of Financial Uncertainty By Grzegorz Długoszek
  6. Expectation formation, financial frictions, and forecasting performance of dynamic stochastic general equilibrium models By Holtemöller, Oliver; Schult, Christoph
  7. Historical Patterns of Inequality and Productivity around Financial Crises By Pascal Paul
  8. The macroeconomic effects of bank capital requirement tightenings: Evidence from a narrative approach By Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
  9. Retirement in the Shadow (Banking) By Ordoñez, Guillermo; Piguillem, Facundo
  10. Locally Owned Bank Commuting Zone Concentration and Employer Start-Ups in Metropolitan, Micropolitan and Non-Core Rural Commuting Zones from 1970-2010 By Craig Wesley Carpenter; F. Carson Mencken; Charles M. Tolbert; Michael Lotspeich
  11. The Big Bang: Stock Market Capitalization in the Long Run By Kuvshinov, Dmitry; Zimmermann, Kaspar

  1. By: Ho, Sin-Yu
    Abstract: We assessed the impact of stock market development on growth in Hong Kong for the period 1986Q2 to 2015Q4. By constructing a composite index of stock market development and controlling for the key determinants of growth, we found stock market development to promote growth both in the short and long run. We further constructed an alternative index of stock market development and found this conclusion to be robust. Our findings are broadly consistent with the growth experience of Hong Kong. Policies meant to promote stock market development may enhance growth in Hong Kong as well.
    Keywords: Determinants; Economic Growth; Stock Market Development; Hong Kong.
    JEL: C32 E44
    Date: 2018–09
  2. By: B. Tugberk Tosunoglu (Anadolu University)
    Abstract: This study aims to analyze the relationship between financial stability and economic growth in Turkey as an emerging market. Financial stability, in general terms, is expressed as the resilience of the economy against the unexpected situations that may disrupt the multi-dimensional equilibrium in the financial system. Although a large number of studies have examined the effect of financial deepening on economic growth, there is a little evidence on the effect of financial stability or soundness on economic growth. A present study considering the 2002 ? 2017 period which covers the implementation of inflation targeting monetary policy regime analyses the short and long-run dynamics of financial stability ? economic growth relationship by using co-integration and ARDL techniques. Obtained results show that a steadily functioning financial system is a requirement for economic growth. In particular, financial leverage, capital adequacy, asset quality, and liquidity are important components of financial stability affecting the economic growth. Thus, formulating the efficient policies to support economic growth requires understanding the factors that affect financial stability.
    Keywords: Economic Growth, Financial Stability
    JEL: F43 E44 E00
    Date: 2018–06
  3. By: Jarrett, U.; Mohaddes, K.; Mohtadi, H.
    Abstract: Theory attributes finance with the ability to both promote growth and reduce output volatility. But evidence is mixed in both regards, partly due to endogeneity effects. For example, financial institutions themselves might be a source of volatility, as the events of 2008 suggest. We address this endogeneity issue by using oil price volatility as a source of exogenous volatility, to study the effect of finance. To do this, we use two empirical methodologies. First, we develop a quasi-natural experiment by studying the dramatic decline of oil prices in 2014 and beyond, using a synthetic control methodology. Our hypothesis is that the ability of oil-rich countries to mitigate the effects of this decline rested on the quality of their financial institutions. We focus on 11 oil-rich countries between 1980 and 2014 that had “poor” measures of financial development (treatment group) out of 20 such countries and synthetically create counterfactuals from the remaining (control) group with “superior” financial development. We subject both to the oil price shock of 2014. We find evidence that better financial institutions do indeed reduce output volatility and mitigate its negative effect on growth in the year that showed a sustained decline of the oil price. To address any remaining potential endogeneity between oil prices and finance, we further examine our findings by using a Panel CS-ARDL approach with 30 oil producing countries in our sample (and data over the period 1980-2016), illustrating that the effect of oil price volatility on growth is mitigated with better financial institutions. Our results make a strong case for the support of the positive role of financial development in growth and development.
    Keywords: Oil price volatility, financial institutions, economic growth and development, and the resource curse.
    JEL: C23 G20 F43 O13 O40 Q32
    Date: 2018–09–12
  4. By: Chang Ma (Johns Hopkins University)
    Abstract: Many emerging market economies have used macroprudential policy to mitigate the risk of financial crises and the resulting output losses. However, macroprudential policy may reduce economic growth in good times. This paper introduces endogenous growth into a small open economy model with occasionally binding collateral constraints in order to study the impact of macroprudential policy on financial stability and growth. In a calibrated version of the model, I find that optimal macroprudential policy reduces the probability of crisis by two thirds at the cost of lowering average growth by a small amount (0.01 percentage point). Moreover, macroprudential policy can generate welfare gains equivalent to a 0.06 percent permanent increase in annual consumption.
    Date: 2018
  5. By: Grzegorz Długoszek (Humboldt-Universität zu Berlin)
    Abstract: This paper investigates the macroeconomic effects of uncertainty originating in the financial sector by using the DSGE framework developed by Gertler and Karadi (2011). The model generates macroeconomic dynamics that are consistent with the empirical evidence. In particular, an increase in the financial uncertainty raises the risk premium and leads to a decline in output, consumption, investment and hours worked. This outcome arises mainly because of an endogenous tightening of the financial constraint, which in turn triggers the financial accelerator mechanism. Finally, nominal and real rigidities act as additional amplification mechanisms for financial uncertainty shocks.
    Date: 2018
  6. By: Holtemöller, Oliver; Schult, Christoph
    Abstract: In this paper, we document the forecasting performance of estimated basic dynamic stochastic general equilibrium (DSGE) models and compare this to extended versions which consider alternative expectation formation assumptions and financial frictions. We also show how standard model features, such as price and wage rigidities, contribute to forecasting performance. It turns out that neither alternative expectation formation behaviour nor financial frictions can systematically increase the forecasting performance of basic DSGE models. Financial frictions improve forecasts only during periods of financial crises. However, traditional price and wage rigidities systematically help to increase the forecasting performance.
    Keywords: business cycles,economic forecasting,expectation formation,financial frictions,macroeconomic modelling
    JEL: C32 C53 E37
    Date: 2018
  7. By: Pascal Paul (Federal Reserve Bank of San Francisco)
    Abstract: To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. Based on long-run historical data for advanced economies, I find that rising top income inequality and low productivity growth are robust predictors of crises – even outperforming wellknown early-warning indicators such as credit growth. Moreover, if crises are preceded by such developments, output declines more during the subsequent recession. In addition, I show that asset booms explain the relation between income inequality and financial crises in the data.
    Date: 2018
  8. By: Sandra Eickmeier; Benedikt Kolb; Esteban Prieto
    Abstract: Bank capital regulations are intended to enhance financial stability in the long run, but may, in the meanwhile, involve costs for the real economy. To examine these costs we propose a narrative index of aggregate tightenings in regulatory US bank capital requirements from 1979 to 2008. Anticipation effects are explicitly taken into account and found to matter. In response to a tightening in capital requirements, banks temporarily reduce business and real estate lending, which temporarily lowers investment, consumption, housing activity and production. A decline in financial and macroeconomic risk helps sustain spending in the medium run. Monetary policy also cushions negative effects of capital requirement tightenings on the economy.
    Keywords: Narrative Approach, Bank Capital Requirements, Local Projections
    JEL: G28 G18 C32 E44
    Date: 2018–09
  9. By: Ordoñez, Guillermo; Piguillem, Facundo
    Abstract: The U.S. economy has recently experienced a large increase in life expectancy and in shadow banking activities. We argue that these two phenomena are intimately related. Agents rely on financial intermediaries to insure consumption during their uncertain life spans after retirement. When they expect to live longer, they rely more heavily on financial intermediaries that are riskier but offer better insurance terms - including shadow banks. We calibrate the model to replicate the level of financial intermediation in 1980, introduce the observed change in life expectancy and show that the demographic transition is critical in accounting for the boom in both shadow banking and credit that preceded the recent U.S. financial crisis. We compare the U.S. experience with a counterfactual without shadow banks and show that they may have contributed around 0.6GDP to output, four times larger than the estimated costs of the crisis.
    Keywords: Ageing Population; financial crisis; shadow banking
    JEL: E21 E44
    Date: 2018–08
  10. By: Craig Wesley Carpenter; F. Carson Mencken; Charles M. Tolbert; Michael Lotspeich
    Abstract: Access to financial capital is vital for the sustainability of the local business sector in metropolitan and nonmetropolitan communities. Recent research on the restructuring of the financial industry from local owned banks to interstate conglomerates has raised questions about the impact on rural economies. In this paper, we begin our exploration of the Market Concentration Hypothesis and the Local Bank Hypothesis. The former proposes that there is a negative relationship between the percent of banks that are locally owned in the local economy and the rate of business births and continuations, and a positive effect on business deaths, while that latter proposes that there is a positive relationship between the percent of banks that are locally owned in the local economy and the rate of business births and continuations, and a negative effect on business deaths. To examine these hypotheses, we examine the impact of bank ownership concentration (percent of banks that are locally owned in a commuting zone) on business establishment births and deaths in metropolitan, micropolitan and non-core rural commuting zones. We employ panel regression models for the 1980-2010 time frame, demonstrating robustness to several specifications and spatial spillover effects. We find that local bank concentration is positively related to business dynamism in rural commuting zones, providing support to the importance of relational lending in rural areas, while finding support for the importance of market concentration in urban areas. The implications of this research are important for rural sociology, regional economics, and finance.
    Date: 2018–08
  11. By: Kuvshinov, Dmitry; Zimmermann, Kaspar
    Abstract: This paper presents annual stock market capitalization data for 17 advanced economies from 1870 to today. Extending our knowledge beyond individual benchmark years in the seminal work of Rajan and Zingales (2003) reveals a striking new time series pattern: over the long run, the evolution of stock market size resembles a hockey stick. The stock market cap to GDP ratio was stable for more than a century, then tripled in the 1980s and 1990s and remains high to this day. This trend is common across countries and mirrors increases in other financial and price indicators, but happens at a much faster pace. We term this sudden structural shift “the big bang” and use novel data on equity returns, prices and cashflows to explore its underlying drivers. Our first key finding is that the big bang is driven almost entirely by rising equity prices, rather than quantities. Net equity issuance is sizeable but relatively constant over time, and plays very little role in the short, medium and long run swings in stock market cap. Second, much of this price increase cannot be explained by more favourable fundamentals such as profits and taxes. Rather, it is driven by lower equity risk premia – a factor that is linked to subjective beliefs and can be quite fickle, and easily reversible. Third, consistent with this risk premium view of stock market size, the market cap to GDP ratio is a reliable indicator of booms and busts in the equity market. High stock market capitalization – the “Buffet indicator” – forecasts low subsequent equity returns, and low – rather than high – cashflow growth, outperforming standard predictors such as the dividend-price ratio.
    Keywords: Stock market capitalization; financial development; financial wealth; equity issuance; equity valuations; risk premiums; equity bubbles
    JEL: E44 G10 G20 N10 N20 O16
    Date: 2018–08–21

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