nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒10‒08
eleven papers chosen by
Georg Man

  1. Optimal Growth Policies in a Two-Sector Model with Financial Market Imperfections By Nguyen, Quoc Hung
  2. A Piecewise Linear Model of Credit Traps and Credit Cycles:A Complete Characterization. By Kiminori Matsuyama; Iryna Sushko; Laura Gardini
  3. Banking and Financial Participation Reforms, Labor Markets, and Financial Shocks By Epstein, Brendan; Finkelstein Shapiro, Alan
  4. Growth Diagnostic for the State of Oaxaca By Rafael Rivera Sánchez; Angel Sarmiento Hinojosa; Sebastián Serra Wright
  5. Why you should use the Hodrick-Prescott filter - at least to generate credit gaps By Mathias Drehmann; James Yetman
  6. "Exchange rates, catch up, and lagging behind in Europe since 1870" By Jonas Ljungberg; Anders Ögren
  7. Financial Inclusion in Asia-Pacific By Elena Loukoianova; Yongzheng Yang; Si Guo; Leni Hunter; Sarwat Jahan; Fazurin Jamaludin; Johanna Schauer
  8. Banking capitalization and financial development in Chad: the comparative effects of the banking process By Djimoudjiel, Djekonbe
  9. Human development thresholds for inclusive mobile banking in developing countries By Asongu, Simplice; Odhiambo, Nicholas
  10. What drives local lending by global banks? By Stefan Avdjiev; Uluc Aysun; Ralf Hepp
  11. Do Foreign Capital and Financial Development affect Clean Energy Consumption and Carbon Emissions? Evidence from BRICS and Next-11 Countries By Shahbaz, Muhammad; Destek, Mehmet; Polemis, Michael

  1. By: Nguyen, Quoc Hung
    Abstract: This paper studies the pro-growth policies in an endogenous growth model where heterogeneous entrepreneurs face collateral constraints, skilled workers accumulate human capital, and the government intervenes to promote human and physical capital formation. It shows that the model has a balanced-growth path whose rate depends on government policy and financial development level. The theoretical analysis also shows that when the distribution of idiosyncratic productivity is heavy-tailed, the government must subsidize productive entrepreneurs to achieve optimal pro-growth policies.
    Keywords: Heterogeneity; Financial Deepening; Growth Policies
    JEL: E10 E22 E44 O16
    Date: 2018–09–08
  2. By: Kiminori Matsuyama (Northwestern University,USA); Iryna Sushko (Institute of Mathematics, National Academy of Science of Ukraine); Laura Gardini (Department of Economics, Society & Politics, Università di Urbino Carlo Bo)
    Abstract: We reconsider a regime-switching model of credit frictions which has been proposed in a general framework by Matsuyama for the case of CobbDouglas production functions. This results in a piecewise linear map with two discontinuity points and all three branches having the same slope. We offer a complete characterization of the bifurcation structure in the parameter space, as well as of the attracting sets and related basins of attraction in the phase space. We also discuss parameter regions associated with overshooting, leapfrogging, poverty traps, reversal of fortune, and growth miracle, as well as cycles with any kind of switching between the expansionary and contractionary phases.
    Keywords: Macroeconomic model of credit frictions; Poverty traps; Growth miracle; One-dimentional piecewise linear map; Border collision bifurcation
    Date: 2018
  3. By: Epstein, Brendan; Finkelstein Shapiro, Alan
    Abstract: The degree of bank competition as well as firms’ and households’ participation in the domestic banking system differ considerably in emerging economies (EMEs) relative to advanced economies (AEs). We build a small-open-economy model with endogenous firm entry, monopolistic banks, household and firm heterogeneity in par- ticipation in the banking system, and labor search to analyze the labor market and aggregate consequences of financial participation and banking reforms in EMEs. We find that there is a pre-reform threshold of firm participation in the banking system below which reform implementation leads to sharper unemployment and aggregate fluctuations amid foreign interest rate and aggregate productivity shocks. Our find- ings suggest that comprehensive banking reforms that foster household participation and bank competition in tandem can reduce labor market and aggregate volatility, but only under a high-enough pre-reform level of firm participation in the banking system and a non-negligible increase in bank competition.
    Keywords: Emerging economies, structural reforms, foreign interest rate shocks, business cycles, banking sector, unemployment, financial participation.
    JEL: E24 E32 E44 F41 G21
    Date: 2017
  4. By: Rafael Rivera Sánchez; Angel Sarmiento Hinojosa; Sebastián Serra Wright
    Abstract: Oaxaca is the second-poorest state in Mexico. It is also growing more slowly than the national average, leading to regional divergence. This paper seeks to diagnose the binding constraints that keep GDP growth in Oaxaca low.
    Keywords: Growth Diagnostic, Oaxaca
    Date: 2018–09
  5. By: Mathias Drehmann; James Yetman
    Abstract: The credit gap, defined as the deviation of the credit-to-GPD ratio from a Hodrick-Prescott (HP) filtered trend, is a powerful early warning indicator for predicting crises. Basel III therefore suggests that policymakers should use it as part of their countercyclical capital buffer frameworks. Hamilton (2017), however, argues that you should never use an HP filter as it results in spurious dynamics, has end-point problems and its typical implementation is at odds with its statistical foundations. Instead he proposes the use of linear projections. Some have also criticised the normalisation by GDP, since gaps will be negatively correlated with output. We agree with these criticisms. Yet, in the absence of clear theoretical foundations, all proposed gaps are but indicators. It is therefore an empirical question which measure performs best as an early warning indicator for crises - the question we address in this paper. We run a horse race using quarterly data from 1970 to 2017 for 42 economies. We find that no other gap outperforms the baseline credit-to-GDP gap. By contrast, credit gaps based on linear projections in real time perform poorly.
    Keywords: early warning indicators, credit gaps, HP filter
    JEL: E44 G01
    Date: 2018–09
  6. By: Jonas Ljungberg (Lund University); Anders Ögren (Lund University)
    Abstract: "It is well known that a country by manipulating the value of its currency can push up its competitiveness in international markets. This notwithstanding, it is much overlooked how exchange rates have influenced economic growth and convergence of income among nations in a longer perspective. In particular, among countries involved in market integration, one could presume that those on a lower level of income should have a higher inflation. The higher inflation, with a concomitant rise of wages, should then erode their competitiveness and counteract convergence. A somehow flexible exchange rate might compensate for this loss and contribute to the catch-up of countries still behind. The theoretical point of departure in this paper is that countries with lower levels of income have also lower levels of prices and wages than richer countries. When poorer countries catch-up with the richer, they necessarily have higher inflation and wage growth. Unless these asymmetries in prices and wages are compensated for by nominal exchange rates, the poorer countries will decline in relative competitiveness. Since we deal with trends over longer periods and not temporary shocks, it is not necessary to determine when a currency is undervalued or overvalued. Instead, the focus can be on the relative change of exchange rates and their long term effects. The paper examines how exchange rate movements have interacted with economic growth and price changes across European countries since 1870. In that purpose, we look at how exchange rates have exposed countries to each other through foreign trade. The contribution of the paper is that effective exchange rates are brought into a long-term analysis of (mostly west-) European growth and convergence. The next section of the paper shortly reviews the treatment of exchange rates and growth in the literature. Section three introduces the history of exchange rates across seventeen European countries, and how the effective exchange rates are estimated. Section four explores the pattern of long-term convergence and divergence of GDP per capita in Western Europe. Section five discusses the interaction between growth, prices, and exchange rates over 1870-2010 divided in five different sub-periods. Section six concludes with a discussion of further implications."
    Keywords: "exchange rates, economic growth, convergence, Europe"
    JEL: E43 E58 E65
    Date: 2017–04
  7. By: Elena Loukoianova; Yongzheng Yang; Si Guo; Leni Hunter; Sarwat Jahan; Fazurin Jamaludin; Johanna Schauer
    Abstract: Asia has made significant progress in financial inclusion, but both its across-country and intra-country disparities are among the highest in the world. The gaps between the rich and the poor, rural and urban populations, and men and women remain deep. Income is the main determinant of the level of financial inclusion; but other factors, such as geography, financial sector structure, and policies, also play important roles. While some countries in the Asia-Pacific region are leaders in fintech, on average the region lags behind others in several important areas such as online (internet) purchases, electronic payments, mobile money, and mobile government transfers. This Departmental Paper aims to take stock of the development and current state of financial inclusion and shed light on policies to advance financial inclusion in the region. The research focuses on the impact of financial inclusion on economic growth, poverty reduction, and inequality, linkages between financial inclusion and macroeconomic policies, as well as structural policies that are important for improving financial inclusion. Given the increasing importance of financial technologies (fintech), the paper also provides a snapshot of the fintech landscape in the Asia-Pacific.
    Keywords: Financial inclusion;Financial institutions;Financial services industry;Poor;financial inclusion, macroeconomic policymaking, fintech, Asia, Asia Pacific, Pacific, macroeconomic policy, access to finance
    Date: 2018–09–18
  8. By: Djimoudjiel, Djekonbe
    Abstract: Chadian government’s decision to integrate officials in 2009 to banking sectors should promote financial development firstly and then to give visibility in the government expenditures. The purpose of this article is to highlight the implications of capitalization and bank risk management on financial development in Chad before and after the banking (financial inclusion) of Chadian officials. To achieve this goal, we used Generalized Method of moment (GMM) and the Seemingly Unrelated Regression (SUR) estimators on truncate data from Chadian banks during the period 2000-2015. As result, Chadian banks recapitalize to reduce bank risks, while risks negatively affect financial development before the start of the banking process. During the period of the mass banking and despite the risk inherent to Chadian customers, the recapitalization of the banks however improved in weak proportion the financial development in Chad.
    Keywords: banking capitalization, financial development, banking risk, GMM, SUR
    JEL: G32 O10 O55
    Date: 2018–09–06
  9. By: Asongu, Simplice; Odhiambo, Nicholas
    Abstract: This study assesses human development thresholds at which mobile banking mitigates poverty and inequality in 93 developing countries for the year 2011. Mobile banking entails: ‘mobile used to pay bills’ and ‘mobile used to receive/send money’, while the modifying policy indicator is the human development index (HDI). The empirical evidence is based on interactive quantile regressions. A summary of the findings shows that with increasing human development: (i) ‘mobiles used to pay bills’ contribute to reducing inequality in countries at the bottom and top ends of the inequality distribution, while (ii) ‘mobiles used to receive/send money’ have an appealing role in promoting inclusive development in all poverty distributions, with the exception of the top-end or 90th decile. The modifying thresholds of the HDI vary from 0.542 to 0.632 and 0.333 to 0.705 in inequality and poverty specifications, respectively. The relevance of the findings is discussed in light of the current transition from Millennium Development Goals to Sustainable Development Goals.
    Keywords: Mobile banking, Quality of growth, poverty, inequality
    JEL: G20 I10 I20 I32 O40
    Date: 2018–01
  10. By: Stefan Avdjiev; Uluc Aysun; Ralf Hepp
    Abstract: We find that the lending behavior of global banks' subsidiaries throughout the world is more closely related to local macroeconomic conditions and their financial conditions than to those of their owner-specific counterparts. This inference is drawn from a panel dataset populated with bank-level observations from the Bankscope database. Using this database, we identify ownership structures and incorporate them into a unique methodology that identifies and compares the owner and subsidiary-specific determinants of lending. A distinctive feature of our analysis is that we use multi-dimensional country-level data from the BIS international banking statistics to account for exchange rate fluctuations and cross-border lending.
    Keywords: bankscope, G-SIB, bank-level data, global banks, BIS international banking statistics
    JEL: E44 F32 G15 G21
    Date: 2018–09
  11. By: Shahbaz, Muhammad; Destek, Mehmet; Polemis, Michael
    Abstract: This study investigates the main interrelations generated by the impact of foreign capital along with financial development on clean energy consumption and environmental degradation proxied by the inclusion of CO2 emissions. In doing so, we used panel data techniques targeted at BRICS and Next-11 countries spanning the period 1992-2016. Our paper strongly accounts for the existence of cross-sectional dependence and non-stationarity usually ignored by the other empirical studies. In case of BRICS, the empirical findings reveal that economic growth increases clean energy consumption while financial development reduces it. On the contrary, foreign capital inflows do not appear to have a statistically significant effect on clean energy. We argue that, economic growth, foreign capital inflows and financial development increase CO2 emissions, while clean energy consumption reduces environmental degradation by mitigating carbon emissions in BRICS countries. In case of Next-11 countries, empirical findings indicate that economic growth and foreign capital have positive effect on clean energy consumption. However, economic growth and financial development increases CO2 emissions in N-11 countries.
    Keywords: Foreign Capital, Financial Development, Clean Energy, CO2 emissions, Panel Data
    JEL: G1 Q4 Q5
    Date: 2018–07–31

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