nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒10‒01
ten papers chosen by
Georg Man

  1. Financial Development Beyond the Formal Financial Market By Lin Shao
  2. Lending standards and output growth By Divya Kirti
  3. The Cyclical Composition of Startups By Eran Hoffmann
  4. Global Financial Risk, Domestic Financial Access, and Unemployment Dynamics By Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
  5. Financial Markets, the Real Economy, and Self-fulfilling Uncertainties By Jess Benhabib; Xuewen Liu; Pengfei Wang
  6. Corporate Debt Choice and Bank Capital Regulation By Haotian Xiang
  7. Does FDI crowd out domestic investment in transition countries? By Cristina Jude
  8. Determinants of the choice of a savings option: "The case of African Households" By Asare, Eris; Nakakeeto, Gertrude; Segarra, Eduardo
  9. Do remittance fl ows promote financial inclusion? By Immaculate Machasio
  10. Young SMEs: Driving innovation in Europe? By Veugelers, Reinhilde; Ferrando, Annalisa; Lekpek, Senad; Weiss, Christoph T.

  1. By: Lin Shao
    Abstract: This paper studies the effects of financial development, taking into account both formal and informal financing. Using cross-country firm-level data, we document that informal financing is utilized more by rich countries than poor countries. To account for this empirical pattern, we build a model in which the supply of informal financing increases with financial development, while the demand for informal financing declines with it. The model generates a hump-shaped relationship between the incidence of informal financing and GDP per capita. Our analysis shows that, at the early stage of economic development, the output loss from financial frictions is reinforced by the low supply of informal financing. Informal financing contributes more to the aggregate output of the richest countries than to that of the poorer countries in our sample.
    Keywords: Financial markets, Firm dynamics, Productivity
    JEL: E44 O17 O47
    Date: 2018
  2. By: Divya Kirti (IMF)
    Abstract: While some credit booms are followed by economic underperformance, many are not. Can lending standards help separate good credit booms from bad credit booms contemporaneously? To observe lending standards internationally, I use information from primary debt capital markets. I construct the high-yield (HY) share of bond issuance for a panel of 38 countries. The HY share is procyclical, suggesting that lending standards in bond markets are extrapolative. Credit booms with deteriorating lending standards (rising HY share) are followed by lower GDP growth in the subsequent three to four years. Such booms deserve attention from policy makers.
    Date: 2018
  3. By: Eran Hoffmann (Stanford University)
    Abstract: This paper proposes a new theory of business cycles based on the idea that financial uncertainty shocks change the nature of innovation. When investors become more risk tolerant, they fund riskier startups with greater growth potential. As these ambitious startups grow, the initial shock propagates and generates a boom in output and employment. I develop a heterogeneous firm industry model of the US business sector with countercyclical risk premia and innovation by startups and existing firms. The quantitative implementation of the model jointly matches time series properties of stock returns and macroeconomic aggregates, as well as micro evidence on firm cohort growth over the cycle.
    Date: 2018
  4. By: Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
    Abstract: We empirically show that after an increase in global financial risk, the response of unemployment is markedly more subdued in emerging economies (EMEs) relative to small open advanced economies (SOAEs), while the differential response of GDP and investment across the two country groups is noticeably smaller, if at all, in EMEs. A model with banking frictions, frictional unemployment, and household and firm heterogeneity in financial inclusion can help rationalize these facts. Limited financial inclusion among households is central to explaining the differ- ential response of unemployment in EMEs amid global financial risk shocks.
    Keywords: Emerging economies, business cycles, unemployment, labor search frictions, financial frictions, financial inclusion.
    JEL: E24 E32 E44 F41
    Date: 2018
  5. By: Jess Benhabib; Xuewen Liu; Pengfei Wang
    Abstract: Uncertainty in both financial markets and the real economy rises sharply during recessions. We develop a model of informational interdependence between financial markets and the real economy, linking uncertainty to information production and aggregate economic activities. We argue that there exists mutual learning between financial markets and the real economy. Their joint information productions determine both the allocative efficiency in the real sector and the market efficiency in the financial sector. The mutual learning creates a strategic complementarity between information production in the financial sector and that in the real sector. A self-fulfilling surge in financial uncertainty and real uncertainty can naturally arise when both sectors produce little information in anticipation of the other producing little information. At the same time, aggregate output falls as the real allocative efficiency deteriorates. In the extension to an OLG dynamic setting, our model characterizes self-fulfilling uncertainty traps with two steady-state equilibria and a two-stage economic crisis in transitional dynamics.
    JEL: E2 E44 G01 G20
    Date: 2018–09
  6. By: Haotian Xiang (Wharton School of the University of Pennsylvania)
    Abstract: I investigate the impact of bank capital requirements in a business cycle model with corporate debt choice. Compared to non-bank investors, banks provide restructurable loans that reduce firm bankruptcy losses and enhance production efficiency. Raising capital requirements eliminates deposit insurance distortions but also deposit tax shields. As a result, firms cut back on both bank and non-bank borrowing while going bankrupt more frequently. Implementing an optimal capital ratio of 11 percent in the US produces limited marginal impacts on aggregate quantities and welfare.
    Date: 2018
  7. By: Cristina Jude
    Abstract: The aim of this paper is to empirically investigate the relationship between FDI and domestic investment in a sample of 10 Central and Eastern European countries over the period 1995-2015. We find FDI to lead to a creative destruction phenomenon, with a short-term crowding out effect on domestic investment, followed by a long-term crowding in. Greenfield FDI develops stronger long run complementarities with domestic investment, while mergers and acquisitions do not show a significant effect on domestic investment. Financial development seems to mitigate crowding out pressures and even foster a crowding in for mergers and acquisitions.
    Keywords: investment, FDI, crowding-out, economic transition, financial development.
    JEL: E22 F21 F43 O52
    Date: 2018
  8. By: Asare, Eris; Nakakeeto, Gertrude; Segarra, Eduardo
    Abstract: Recent research shows that about 2.5 million people have no access to financial services worldwide. The research also shows that Africa, the home to 70 percent of the world’s least developed countries, has 80 percent of its population unbanked. These statistics are particularly disturbing as they have direct implications for economic growth. This is because, financial inclusion, including savings, has been shown to have a positive impact on economic growth and development. However, recent empirical research is limited in explaining the determinants of the choice of the savings option in Africa. By using survey data obtained from the World-Global Financial Inclusion (Global Findex) Database, 2014, we investigate how household’s characteristics affect their choice of a saving option. We use the multinomial probit model due to its ability to account for issues of independence of irrelevant alternatives (IIA). Our results indicate that there is a strong disconnect between female entrepreneurs and the formal banking sector.
    Keywords: Agricultural Finance
    Date: 2018–02–02
  9. By: Immaculate Machasio (University of Giessen)
    Abstract: In this paper, we evaluate whether remittances promote financial inclusion in developing countries. We construct an index of financial inclusion and present single equation estimates of the effects of remittances on financial inclusion. The paper uses data on remittance fl ows to 61 developing countries from different regions around the world spanning from 1990-2014 to explore this nexus. The study uses fixed effects estimations as well as GMM IV estimation method of panel data econometric analysis. The regression results confirm the hypothesis that remittances have an impact on financial inclusion through their effect on financial sector development. This can be intuitively explained by the fact that sending and receiving remittances increase senders and recipients use of financial services. The study shows that indeed remittances increase financial inclusion by about 2.49%. Remittances can therefore be considered a catalyst of financial inclusion in development.
    Keywords: Remittances, Financial inclusion, Instrumental variables
    JEL: C23 F34 H63
    Date: 2018
  10. By: Veugelers, Reinhilde; Ferrando, Annalisa; Lekpek, Senad; Weiss, Christoph T.
    Abstract: Using large scale EIB Investment Survey evidence for 2016 covering 8,900 non-financial firms from all size and age classes across all sectors and all EU Member States, we identify different innovation profiles based on a firm's R&D investment and/or innovation activities. We find that "basic" firms - i.e. firms that do not engage in any type of R&D or innovation - are more common among young SMEs, while innovators - i.e. firms that do R&D and introduce new products, processes or services- are more often old and large firms. This hold particularly for "leading innovators", ie those introducing innovations new to the market. To further explore why young SMEs are not more active in innovation, we explore their access to finance. We confirm that young small leading innovators are the most likely to be credit constrained. Grants seem to at least partly addressing the external financing access problem for leading innovators, but not for young SMEs.
    Keywords: young small companies,innovation,access to finance
    JEL: G24 O31 O38
    Date: 2018

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